The spreading global outbreak of the novel coronavirus (2019-nCoV or Covid-19) has now met another of the conditions within the trigger mechanism of the World Bank’s pandemic catastrophe bond transaction, raising the chance that noteholders face losses in the coming weeks.



As we have explained, the novel coronavirus (2019-nCoV or Covid-19) outbreak that began in the city of Wuhan in Hubei province China poses a threat to the World Bank’s $320 million IBRD CAR 111-112 pandemic catastrophe bond transaction that provides a source of insurance or reinsurance capital to back the Pandemic Emergency Financing Facility (PEF).

The coronavirus outbreak has the potential to become an eligible event under the terms of the World Bank’s pandemic catastrophe bond notes that provide insurance or reinsurance like capacity to back a pandemic financing facility.

The bonds and reinsurance like component of the financing behind the facility can be triggered if the outbreak reaches pandemic levels and meets certain pre-defined trigger criteria, in terms of officially confirmed cases, growth rate, fatalities and international spread.

The first condition that was met was for the number of confirmed deaths occurring in China, the source country of the outbreak.

As deaths in China have continued to escalate, reaching some 2,744 as of today (Feb 27th), this trigger condition had already been met.

Now, Iran has reported deaths in the country from the coronavirus have reached 26, which is higher than the trigger condition concerning international spread of any outbreak, further heightening the risk of default to the pandemic catastrophe bond notes.

We have to stress here that this is the Iranian government’s figure, not the official WHO reported number that would be used to determine whether any default or payout was due. So while the number has surpassed the point required by the trigger, it would still need to be reported as such by the WHO and also be subject to a calculation agent review as well, before it would be determined whether a payout came due.

But at 26 already it seems like we can consider that this second important trigger condition for the pandemic catastrophe bond will now be breached.

As a reminder, the World Bank facilitated pandemic catastrophe bond is structured into two tranches, issued to investors as $225 million of Class A notes and $95 million of Class B notes, with both exposed to a coronavirus outbreak, but under different terms and reflecting different levels of risk.

The Class A notes require a coronavirus outbreak to result in over 2,500 deaths (already met in China alone), with at least 250 cases being confirmed on a rolling basis, as well as more than 20 deaths being seen in at least one country overseas (now met in Iran), for an initial 16.67% loss of principal to this tranche to occur.

Higher losses require higher numbers in all cases and there is a stepped payout mechanism for both tranche of notes.

The Class B notes are the more likely to face triggering under a qualifying outbreak event, as only more than 250 confirmed deaths are required, alongside the other factors, for a payout to be due.

The trigger criteria for the Class B notes is more complicated though, as different payout rates are applicable depending on how many countries outside of the originating country see more than 20 confirmed deaths each. Right now it looks like this is just one country so far, in Iran, although Italy has now seen 14 deaths and South Korea 13.

Alone this isn’t going to trigger the pandemic cat bonds, as other conditions also need to be met, as defined in the underlying insurance contract terms.

But there is a significant amount of misinformation being spread about this cat bond and its trigger, so we’ll try to clear up some of this here.

There is no need for a pandemic to be declared by the WHO, or any other body, for the cat bond to trigger.

The pandemic cat bond notes are exposed whether coronavirus is officially declared to be a global pandemic or not. It has been spread widely in mainstream media that some official determination needs to be made, but this is not the case.

There does need to be an 84 day period since the beginning of an outbreak event. We’re told this period will end March 23rd, so the notes cannot be triggered until that day at the earliest.

There does need to be a certain level of positive growth rate, in terms of the number of cases being officially reported as of that date.

So the earliest we could see any triggering of the pandemic catastrophe bond, at any percentage level of payout, will be after March 23rd and only if the growth rate is positive and meets the necessary terms of the trigger contract language as well.

So now with two conditions of the trigger met, it’s likely the market will consider the risk heightened further for the pandemic catastrophe bond notes.

Already the notes had been marked down in secondary markets, as we’d explained again in our latest update yesterday.

There’s a chance now that the secondary price deteriorates further, although likely not considerably until we get closer to the middle of March and if the growth rate in cases continues to be positive at that time. At that point we could see steeper mark-downs occurring, as the end of the 84 day event duration period nears.

Based on this latest development, the risk of loss for holders of the pandemic catastrophe bond notes seems to be rising further, in line with the ongoing global spread of this coronavirus outbreak.

We’ll update you as and when necessary to explain the risk posed to the IBRD CAR 111-112 pandemic catastrophe bond notes from this increasingly global coronavirus outbreak.

Update: Investor Plenum said that it expects the secondary price of the pandemic cat bond notes will decline further, perhaps significantly, on the back of this news.