Pandemic bonds: execution risk | Financial Times

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It takes a special kind of ineptitude to create a financial instrument that benefits neither side of the transaction. The World Bank’s pandemic bonds managed to do just that. Hence, few tears will be shed over its ditched plans for a second offering.

One set of investors were wiped out; the other barely washed their faces. The supposed beneficiaries — poor countries battling Covid-19 — received scant proceeds long after the virus began its spread. 

The well-meaning bonds, launched in the wake of the Ebola pandemic in 2017, had several design flaws. First, they were massively complex: the prospectus ran to 386 pages and set out multiple triggers for payment, based around outbreak size, growth and spread.

Eligibility criteria was all over the shop. Funding was aimed at the world’s poorest 70-odd countries, but payment was triggered by cases in a larger group. Thus Iran, for example, counted as a trigger country but not a beneficiary. Designed around Ebola — a disease with high mortality rates but far less transmissible — the conditions jibbed with a pandemic. A pandemic qualifying period of 84 days — starting on December 31 and payout triggered on April 17 — was far too long for a rapidly spreading virus.

Despite offering high coupons, investors fared poorly. Tranche B holders were wiped out, although interest payments over the past two-plus years would have let them recoup maybe 30 per cent of their principal, DBRS Morningstar’s Marcos Alvarez estimates. Tranche A trade at about 80 per cent of par, but interest payments probably cover the gap. Pandemic bonds — by definition — are all-encompassing and correlate closely with the broader economy. That contrasts with catastrophe bonds. Buyers of hurricane insurance, for example, picked up gains during the carnage of the 2008-09 financial crisis.

Still, failure of the bonds — dubbed “financial goofiness” by Larry Summers — should not dismiss the concept of transferring risk to the markets. Appetite remains; witness the increase in life insurance sales after Sars. Time for the private sector to take up the baton.

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