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After COVID-19: The future of pandemic bonds

Introduced by the World Bank in response to 2014’s Ebola outbreak, pandemic bonds have good intentions, but COVID has underscored their limitations.


Investors are commonly advised not to try to time the market. While specific peaks and valleys can be difficult to predict with precision, we do know that bull and bear markets will happen. Investors that take the long view have the potential to achieve sustained gains overall.

It is similarly difficult to predict specific outbreaks of disease. No one could have been reasonably expected to predict the impact COVID-19 would have on global economies in 2020 if asked on a cool fall day in late 2019. But while the timing of a specific disease outbreak cannot be anticipated, we do know that outbreaks can and do occur. This was the basis for the World Bank’s inaugural issuance of pandemic bonds in 2017, which accounted for the possibility of a coronavirus pandemic. 

Pandemic bonds were issued by the World Bank following an insufficient attempt to raise funds to fight an Ebola outbreak in 2014 and aim to create a market for “pandemic risk insurance.” These financial instruments, modeled after catastrophe bonds that pay out in response to events such as hurricanes, aim to disburse large sums of money to countries with insufficient health infrastructure more quickly than traditional fundraising methods used by the World Bank. Globally, shoring up health care systems in IDA/IBRD countries is a crucial element of both combating pandemics and impeding the spread of highly contagious diseases.1 The World Bank’s inaugural 2017 issuance covered six viruses considered most likely to cause a pandemic, including:

- New Orthomyxoviruses (new influenza pandemic virus A)

- Coronaviridae (SARS, MERS)

- Filoviridae (Ebola, Marburg)

- Other zoonotic diseases (Crimean Congo, Rift Valley, Lassa fever)

Private investors are incentivized to purchase these pandemic bonds due to the potential diversification benefits they provide, as well as the high coupon (the World Bank’s 2017 issuance offered a 6.9% coupon rate for Tranche A [which covered flu and coronavirus] and 11.9% for the riskier Tranche B [which covered filovirus, coronavirus, Crimean Congo, Rift Valley, and Lassa Fever])”. The high returns were promised in exchange for the risk that a global pandemic necessitated the use of investor’s principal to support struggling health systems.

While the maximum payout of the 2017 issuance was $195.8 million (a small sum relative to the billions being mobilized globally for developing countries to combat this pandemic), the lessons learned from how these bonds have performed in the current pandemic may help make them more effective in future pandemics.

Pandemic bonds: Lessons learned from COVID-19

These inaugural pandemic bonds have faced criticism from the global health community for their lack of impact. Although the coverage of potential pandemic-causing diseases has been comprehensive, the complexity of the bonds’ structure has made them slow to respond to current needs. The structure of the existing issuances established a series of trigger conditions that, when tripped, release bond principal to the World Bank’s Pandemic Emergency Financing Facility to combat contagions. It has been the complexity and rigidity of these trigger conditions that has slowed the release of funds to the World Bank’s facility.

Although COVID-19 was declared a pandemic by the World Health Organization (WHO) on March 11, current pandemic bonds require a waiting period of 12 weeks following a pandemic’s “event date,” after which an arbitrator must determine that the exponential growth rate is positive before finally unlocking funds. The data collection and analysis necessary to make this determination takes an additional two weeks, bringing the total delay to 14 weeks from the event date. Principal reduction may finally occur five days after such a decision, on the 15th of each month. On April 9, AIR Worldwide, the third-party calculation agent the World Bank selected to determine if the bond’s trigger conditions had been met, determined in its first “eligible event report” that the outbreak did not yet meet the exponential growth rate criterion. Experts believe this was due to China’s large case growth in January, which skewed the curve of case growth.2 On April 17, AIR recommended the maximum allowable release for a coronavirus pandemic. Due to restrictions on when that money can be disbursed, developing countries had to wait until May 15 to receive funds.3 

Pandemic bonds that fail to expediently disburse funds to at-risk countries during the proliferation of a global pandemic are not meeting their public health objectives. Over the course of the bonds, investors have earned around $96 million in interest. Nonetheless, the long waiting period between the triggering outbreak and the disbursement of proceeds, and the complexity of triggering criteria, have done little to protect investors. Conversely, these provisions have had a materially deleterious effect on the potential impact of the bonds. Investors rightfully want guarantees that their principal will not be lost due to false alarms, but as the 2017 bonds’ 200% oversubscription suggests,4 low rate environments may make these high-yielding instruments attractive enough to allow for more responsive triggering mechanisms in the future (although investors’ appetite for this type of risk may change following this pandemic).

Is there a future for pandemic bonds?

The current structure of the World Bank’s pandemic bonds does not adequately address the need to mobilize capital to poorer countries in an effective time frame. Critically, however, the importance of the problem that the World Bank identified and sought to mitigate has been reinforced. Although investors in the current pandemic bonds have been stung, high-yielding pandemic debt in the future may still be attractive, especially of shorter lengths (the current issuance had a maturity of three years at issuance). 

The complexity of disbursement requirements in current pandemic bonds may actually make it harder for investors to properly evaluate principal risk. Per Marcos Alvarez, head of insurance at credit ratings firm DBRS Morningstar, “The prospectus for this bond is almost 400 pages and I think you need like two Ph.D.s to understand what’s in there.” Clearer and more decisive triggering mechanisms will allow for increased public health impact while allowing for more accurate pricing of the issuances. These changes likely include a reduction of the 12-week waiting period, and earlier trend data collection so that funds may help to prevent exponential case growth, rather than react to it. A separate solution may be to tie the “trigger” to third-party determinations (such as a WHO pandemic declaration), which would make the World Bank’s current time-intensive data collection process unnecessary. Any independent trigger mechanism that relies on accurate and timely public health data from, among other geographies, the world’s least developed countries comes with a significant set of challenges including of testing infrastructure and data transparency. Such data will likely lag the situation on the ground, at best. To the extent that reliance on such data can be avoided, it should be. In the current crisis, many poor countries cannot get their hands on enough coronavirus tests to prove they are experiencing cases. Triggering events that take into account other information, such as emerging data on a disease’s reproduction number (R0) will ensure the most effective use of principal from pandemic bonds.

If updated estimations on the likelihood of future pandemics make similar instruments less attractive moving forward, alternative pandemic financing strategies may be more effective in addressing the challenge of mobilizing adequate funds to in-need countries in an expedient manner. The structure used by Gavi the Vaccine Alliance (Gavi) in its vaccine bonds may be a useful framework to meet this challenge. Under this framework, developed donor countries make legally binding and irrevocable pledges to support the issuance of related bonds. Bonds are then issued to investors to “front-load” the proceeds and accelerate positive health impacts, while investors receive interest and principal from donor countries over time.¹⁰ Global organizations that plan to issue future securities similar to these investment-grade bonds may be able to secure higher levels of donor commitment in the years following this pandemic, when political will and motivation to take global action to prevent future crises will be more abundant. Gathering long-term sovereign commitments to secure ad-hoc pandemic bonds in response to WHO pandemic declarations may be an alternative method by which private markets can support developing health systems during contagions, and would mobilize faster than reactive fundraising efforts in the same countries.


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1 The International Development Association (IDA) and International Bank for Reconstruction and Development (IBRD) are international financial institutions that serve as lending arms of The World Bank Group. The IDA provides loans and grants to governments with very low levels of income (in 2020, the GNI per capita threshold was at or under US$1,175) which have a need for concessional resources to finance their country’s development. The IBRD provides loans (but not grants) to governments of middle-income countries and creditworthy low-income countries.

2 Pandemic Insurance Has Yet to Pay Out to Poor Countries, The Wall Street Journal, 04/10/2020

3 Pandemic Bond Payouts Likely to Be Held Up by Fine Print, Bloomberg Fixed Income, Bloomberg, 03/18/2020

4 World Bank Launches First-Ever Pandemic Bonds to Support $500 Million Pandemic Emergency Financing Facility, Word Bank, 06/28/2017