Pandemic bond trigger failure shows flaws of relying on reporting by poorest countries


The World Bank’s pandemic bonds, issued in 2017 and designed to help poor countries deal with the effects of a disease pandemic earlier than traditional insurance schemes such as catastrophe bonds, have failed to hit their triggers at the first opportunity since the coronavirus outbreak began.

As Euromoney has previously reported, April 9 was the earliest point at which a determination as to whether the bonds would pay out could be made. On that date the independent calculation agent, AIR Worldwide, submitted its report that the outbreak had not met the precise requirements for the bonds to suffer a reduction in principal, which would have seen money made available to developing countries if they requested it.

The maximum payout from the $425 million bond and swap package within the World Bank’s Pandemic Emergency Facility (PEF) in the case of coronavirus is just $195.8 million, with bondholder losses limited to $132.5 million.

Those sums make the facility largely irrelevant when compared with the billions being mobilized elsewhere for developing countries in response to the outbreak – including by the World Bank itself. But the pandemic bonds had nonetheless attracted much attention because of their claim to be mobilizing the capital markets in an innovative way to help fight disease.

Irrespective of the merits of that claim, the question of whether the bonds were likely to be of any real value was increasingly coming into focus as their complex trigger mechanisms became more widely known.

Case growth rate

The bonds’ principal write-down feature is dependent on a number of factors, including: the time since the start of the outbreak; the number of countries where cases have been confirmed; the number of cases within a 12-week rolling period; the number of deaths in countries within the International Bank for Reconstruction and Development (IBRD) and International Development Association (IDA) categories; the ratio of confirmed cases to total cases; and the case growth rate.

As Euromoney has reported, it was the last of these, the case growth rate, that was likely to prove the most problematic. And on the first possible payout date, April 9, it was indeed this trigger that was not met.

The last criterion required to activate payment of the pandemic bonds … has not been met 

 – World Bank

The problem is that, while all other criteria had been met by the end of the initial minimum 12-week period since the designated start of the outbreak on December 31, 2019, there was always a further requirement for cases to be growing fast enough in IBRD/IDA countries after that point. That trigger would rely therefore on those countries not only suffering a sufficiently high case growth rate during that period but also being able to report that data reliably.

Although it is technically possible that coronavirus cases are not yet spreading sufficiently quickly in developing nations to have triggered the bonds, this would fly in the face of the evidence of case growth seen in developed countries where there are well-resourced healthcare networks able to report disease data. And even in those countries there has been considerable variation in reporting and testing methodologies.

Social distancing

Therefore there is a widespread assumption among healthcare and scientific communities around the world that developing countries are likely to be reporting just a fraction of coronavirus cases at the moment. Reports from many densely-populated urban areas of developing countries continue to document a widespread lack of the social distancing actions taken in richer, less population-dense nations. And in any case, for many communities a lack of basic hygiene facilities makes such objectives irrelevant.

Additionally, the time period for the calculation of this last trigger – which excludes the initial 12-week period – has made it less likely to be triggered. China, for example, is an IBRD country but has in recent weeks seen reported cases fall fast.

All this has now fed into the first calculation of whether the pandemic bonds should be triggered. The World Bank said on April 9: “The last criterion required to activate payment of the pandemic bonds, an exponential growth rate in IDA/IBRD countries as calculated by the third-party calculation agent (AIR Worldwide), has not been met.”

The calculation agent’s next report will take into consideration the week that has passed since the time period for the first report, as the growth rate calculation is based on a rolling two-week period.

The next reporting date is Friday.

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