What Will Happen to World Bank Pandemic Bonds Investors Due to Coronavirus?

  • The world bank has placed the world's first "pandemic" bonds and derivatives to support developing countries in the event of an outbreak of infectious diseases.
  • The decision of WB to issue pandemic bonds was the result of the Ebola epidemic.
  • The Pandemic bonds maturity date is July 15, 2020.

Coronavirus (COVID19) has been in the news daily. The World Health Organization officially declared COVID19 a pandemic. The infected with the virus include start athletes, movie stars, an dpoliticians. The number of people infected with the virus continues to increase. Thus far, a myriad of nations have suspended travel.  The world bank has placed the world’s first “pandemic” bonds and derivatives to support developing countries in the event of an outbreak of infectious diseases.

The World Bank is an international financial institution that provides loans and grants to the governments of third world countries for the purpose of pursuing capital projects. It is comprised of two institutions: The International Bank for Reconstruction and Development, and the International Development Association. The WB headquarters are in Washington D.C.

The International Bank for Reconstruction and Development is an international financial institution that was established in 1944. It is also the lending arm of World Bank Group. The IBRD offers loans to middle-income developing countries.

The International Development Association is an international financial institution which offers concessional loans and grants to the third world countries.

A unique structure combines funding from bonds issued with over-the-counter derivatives that transfer the risk of a pandemic outbreak to counter parties in derivative transactions. The world Bank claimed that this structure was used to attract a diverse group of investors. The biggest holders of such bonds are the Japanese and German governments.

The decision of the WB to issue pandemic bonds was the result of the Ebola epidemic that killed 11,000 people in Guinea, Liberia, Sierra Leone and other countries in West Africa in 2013.  At the time, the WB estimated that the death toll would have been 90% lower if countries had had access to funding in the early stages of the virus’s spread.  Overall International organizations have spent close to $7 billion to fight the Ebola Epidemic. From the risk management prospective, to implement risk controls, it is a good idea to create such bonds.

The WB was able to raise $320 million. WB placed two series of bonds with a three-year maturity of $225 million and $95 million. The WB offered swaps of $105 million to protect the poorest countries from pandemics. The payment of the bond would be suspended in the event of an outbreak of new flu or coronoviruses, such as SARS, MERS. The proceeds were transferred to the special Fund created by the world Bank in 2016 – the Mechanism for financing emergency measures in the event of a pandemic  is the Pandemic Emergency Financing Facility, PEF.

The World Health organization took its time declaring COVID19 as a pandemic. WHO is very cautious in declaring any type of virus to an elevated status. However, in light of the growing coronavirus outbreak, investors who purchased WB bonds stand to lose millions of US dollars, since WHO labelled it as a pandemic. WB bonds were sold under the condition that those who invested in them would lose their investment,  if any of the six deadly pandemics, including the coronavirus, occurred. If the pandemic had not occurred before the bond maturity date of July 15, 2020, investors would have received back what they originally paid for the bonds, in addition to being paid interest and premiums on those bonds that they received between the purchase date and the bond’s maturity date.

Besides one of the worst impact on the stock market, COVID19 also going to wipe out global investments in such bonds.

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Christina Kitova

I spent most of my professional life in finance, insurance risk management litigation.

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