The World Bank (International Bank for Reconstruction and Development) today launched specialized bonds aimed at providing financial support to the Pandemic Emergency Financing Facility (PEF), a facility created by the World Bank to channel surge funding to developing countries facing the risk of a pandemic.
This marks the first time that World Bank bonds are being used to finance efforts against infectious diseases, and the first time that pandemic risk in low-income countries is being transferred to the financial markets.
The PEF will provide more than $500 million to cover developing countries against the risk of pandemic outbreaks over the next five years, through a combination of bonds and derivatives priced today, a cash window, and future commitments from donor countries for additional coverage.
The transaction, that enables PEF to potentially save millions of lives, was oversubscribed by 200% reflecting an overwhelmingly positive reception from investors and a high level of confidence in the new World Bank sponsored instrument. With such strong demand, the World Bank was able to price the transaction well below the original guidance from the market. The total amount of risk transferred to the market through the bonds and derivatives is $425 million.
“With this new facility, we have taken a momentous step that has the potential to save millions of lives and entire economies from one of the greatest systemic threats we face,” World Bank Group President Jim Yong Kim said. “We are moving away from the cycle of panic and neglect that has characterized so much of our approach to pandemics. We are leveraging our capital market expertise, our deep understanding of the health sector, our experience overcoming development challenges, and our strong relationships with donors and the insurance industry to serve the world’s poorest people. This creates an entirely new market for pandemic risk insurance. Drawing on lessons from the Ebola Outbreak in West Africa, the Facility will help improve health security for everyone. I especially want to thank the World Health Organization and the governments of Japan and Germany for their support in launching this new mechanism.”
The World Bank announced the creation of the PEF in May 2016 at the G7 Finance Ministers and Central Governors meeting in Sendai, Japan. The PEF will quickly channel funding to countries facing a major disease outbreak with pandemic potential. Its unique financing structure combines funding from the bonds issued today with over-the-counter derivatives that transfer pandemic outbreak risk to derivative counterparties. The structure was designed to attract a wider, more diverse set of investors.
The PEF has two windows. The first is an ‘insurance’ window with premiums funded by Japan and Germany, consisting of bonds and swaps including those executed today. The second is a ‘cash’ window, for which Germany provided initial funding of Euro 50 million. The cash window will be available from 2018 for the containment of diseases that may not be eligible for funding under the insurance window.
The bonds and derivatives for the PEF’s ‘insurance’ window were developed by the World Bank Treasury in cooperation with leading reinsurance companies Swiss Re and Munich Re. AIR Worldwide was the sole modeler, using the AIR Pandemic Model to provide expert risk analysis. Swiss Re Capital Markets is the sole book runner for the transaction. Swiss Re Capital Markets and Munich Re are the joint structuring agents. Munich Re and GC Securities, a division of MMC Securities LLC are co-managers.
Swiss Re Capital Markets Limited, Munich Re and GC Securities were also joint arrangers on the derivatives transactions.
The bonds will be issued under IBRD’s “capital at risk” program because investors bear the risk of losing part or all of their investment in the bond if an epidemic event triggers pay-outs to eligible countries covered under the PEF.
The PEF covers six viruses that are most likely to cause a pandemic. These include new Orthomyxoviruses (new influenza pandemic virus A), Coronaviridae (SARS, MERS), Filoviridae (Ebola, Marburg) and other zoonotic diseases (Crimean Congo, Rift Valley, Lassa fever).
PEF financing to eligible countries will be triggered when an outbreak reaches predetermined levels of contagion, including number of deaths; the speed of the spread of the disease; and whether the disease crosses international borders. The determinations for the trigger are made based on publicly available data as reported by the World Health Organization (WHO).
Countries eligible for financing under the PEF’s insurance window are members of the International Development Association (IDA), the institution of the World Bank Group that provides concessional finance for the world’s poorest countries. The PEF will be governed by a Steering Body, whose voting members include Japan and Germany. WHO and the World Bank serve as non-voting members.
The World Bank has developed some of the most innovative catastrophe risk insurance instruments in the market to help developing countries manage risk. In the past ten years the institution has executed approximately $1.6 billion in catastrophe risk transactions.
|IBRD Pandemic Bonds Distribution by Investor Type and Location|
|Distribution by Investor Type||Class A||Class B|
|Dedicated Catastrophe Bond Investor||61.7%||35.3%|
|Distribution by Investor Location||Class A||Class B|
|IBRD Pandemic Bonds Summary Terms and Conditions*|
|Type of Note||Class A||Class B|
|Issuer:||International Bank for Reconstruction and Development||International Bank for Reconstruction and Development|
|Trade Date:||June 28, 2017||June 28, 2017|
|Final Size (Bond only)**||USD 225 million||USD 95 million|
|Settlement Date:||July 7, 2017||July 7, 2017|
|Scheduled Maturity Date:||July 15, 2020 extendable monthly in whole or in part, up to a maximum of 12 months following the Scheduled Maturity Date||July 15, 2020 extendable monthly in whole or in part, up to a maximum of 12 months following the Scheduled Maturity Date|
|Bond Coupon:||6m USD LIBOR +6.50%||6m USD LIBOR +11.10%|
|Covered Perils:||Flu, Coronavirus||Filovirus, Coronavirus, Lassa Fever, Rift Valley Fever and Crimean Congo Hemorrhagic Fever|
|Redemption Amount:||The Notes will not be fully repaid if an event occurs||The Notes will not be fully repaid if an event occurs|
(*) Please see the Supplemental Prospectus for a detailed description of the Terms and Conditions of the bonds, the related risks with regard to an investment in the bonds and the relevant offering restrictions. Any offer of the bonds will solely take place on the basis of the Supplemental Prospectus prepared by the World Bank or on behalf of the World Bank.
(**) There was an additional $105 million size done in the derivatives market.
About the World Bank
The World Bank (International Bank for Reconstruction and Development, IBRD), rated Aaa/AAA (Moody’s/S&P), is an international organization created in 1944 and the original member of the World Bank Group. It operates as a global development cooperative owned by 189 nations. It provides its members with financing, expertise and coordination services so they can achieve equitable and sustainable economic growth in their national economies and find effective solutions to pressing regional and global economic and environmental problems.
The World Bank has two main goals: to end extreme poverty and promote shared prosperity. It seeks to achieve them primarily by providing loans, risk management products, and expertise on development-related disciplines to its borrowing member government clients in middle-income countries and other creditworthy countries, and by coordinating responses to regional and global challenges. It has been issuing sustainable development bonds in the international capital markets for 70 years to fund its activities that achieve a positive impact.
Information on World Bank bonds for investors is available on the World Bank Treasury website: www.worldbank.org/debtsecurities
Christian Mumenthaler, Group CEO of Swiss Re, said “We are very proud to have supported the World Bank over the past two and a half years in the endeavor to build an innovative insurance vehicle to better respond to epidemic outbreaks. Swiss Re was co-mandated by the World Bank to develop and design the “insurance window” of PEF and lead the marketing efforts of the transaction in its role as sole book-runner for the capital market placement. The combined derivative/capital markets structure is just one of many pioneering elements of this transaction. Addressing one of the world’s most systemic risks, it underpins Swiss Re’s commitment to making the world more resilient and its continued leadership in the insurance linked securities market.”
Joachim Wenning, Chairman of the Board of Management of Munich Re, said: “The PEF shows how close collaboration between the public sector and insurers can help limit the negative effects of catastrophes in developing countries. Munich Re is proud to have played a major part in this proactive and reliable financing mechanism from the very beginning. I’m confident that our core competences in risk modelling, identification and management will further this very good cause – strengthening the resilience of companies and societies alike. We truly hope that the PEF will become a sustainable and integral part of a global health architecture to make our planet more resilient to dangerous epidemic and pandemic risks.”
Peter Hearn, President and CEO of Guy Carpenter & Co, said: “Our capital agnostic perspective delivers an innovative combination of catastrophe bonds and swaps, giving the World Bank a diverse range of cost-effective risk transfer products supported by both capital markets investors and traditional (re)insurers,” said “This facility will enhance funding for emergency response and give ILS investors and (re)insurers greater access to a non-correlating class of risk, and we are honored to have assisted the World Bank with implementation of its financing.”