Pandemic Bonds – Failing and In Need of Reform - Brown Rudnick

Friday March 27, 2020

The global COVID-19 pandemic has gripped the world and sent financial markets into a downward spiral. However, amongst the blizzard of breaking news and nation-wide shutdowns, it has not gone unnoticed by financial analysts that the World Bank's pandemic bonds have been slow to payout. This delay has led pandemic bonds to be branded "obscene" and "a complete failure" but what are they, why have they faced such criticism and what can we learn from their failings?  

What are Pandemic Bonds?


The first pandemic emergency financing bonds, more commonly known as ‘pandemic bonds’, were launched in June 2017 by the World Bank in the wake of the 2014 Ebola outbreak in West Africa. These have a scheduled maturity date of 15 July 2020 and are therefore of highly topical interest. Following the failure of the World Health Organisation (“WHO”) to get wealthier countries to assist in the fight against Ebola, the US$500m scheme was designed to help the world's poorest by targeting financing to developing countries facing the risk of a pandemic.

Hailed at their launch by former World Bank President Jim Yong Kim as a "momentous step", pandemic bonds are designed to pre-fund the Pandemic Emergency Financing Facility ("PEF"). The creation of PEF was announced by the World Bank at the G7 Finance Ministers’ meeting in Japan in May 2016 and combines funding from pandemic bonds with embedded over-the-counter derivatives that transfer pandemic outbreak risk to derivative counterparties and determine the interest amounts and the amount, if any, payable at maturity.

The PEF has two windows. The first is an ‘insurance’ window with premiums funded by Japan and Germany, consisting of bonds and swaps. The second is a ‘cash’ window, for the containment of diseases that may not be eligible for funding under the insurance window.

The bonds pay a coupon to investors until an epidemic satisfies prescribed payout conditions, at which point the funds are not repaid in full and are deployed instead to tackle the outbreak. The bonds were issued by the International Bank for Reconstruction and Development (“IBRD”) – the lending arm of the World Bank. Despite being launched under the IBRD’s "capital at risk" program, the pandemic bonds were oversubscribed by 200% at launch.


Payment Conditions

The pandemic bonds consist of two tranches. Class A (US$225m), designed to cover flu and coronavirus (meaning any virus which belongs to the subfamily Coronavirinae of the family Coronaviridae) outbreaks, provides investors with an annual interest of LIBOR plus 6.9% Tranche B (US$95m), designed to cover coronavirus and Ebola, pays LIBOR plus 11.5%.

Each tranche has specified payout conditions that are detailed in the IBRD’s supplemental prospectus dated 28 June 2017. For example, on PT-14 of the supplemental prospectus are the “Class A Coronavirus Payout Conditions”.

Amongst others, these are requirements that:

(i) more than 2,500 people have died;

(ii) 20 of these deaths must have occurred outside of the country of origin; and

(iii) the geographical scope of the outbreak is regional or global.

Crucially, neither tranche will payout until 12 weeks after the WHO publishes its first “situation report”. In addition to this, a further time period is needed to calculate the growth rate and confirmation ratio data that relate to that day so the earliest date on which all trigger conditions are met for COVID-19 is 9 April 2020.

According to the FT, if all trigger conditions are met on that date, Tranche B bondholders should lose the entirety of their investments, whilst Tranche A investors lose a maximum 16.7%, for a total payout of US$132.5m. As reported by DBRS Morningstar, proceeds could go to countries that have suffered coronavirus outbreaks, such as Pakistan, Nigeria, Cambodia, Senegal, Nepal and Afghanistan.

“It waits for people to die”

The existence of numerical criteria has been labelled by critics as fundamentally at odds with providing proactive and early intervention to prevent transmission. By requiring the outbreak to have already reached pandemic levels, the payout conditions could mean that the timing of the release of funds from the bond proceeds conflicts with the tried and tested model of early detection and early response to contain and defeat an outbreak. The requirements for the bonds proceeds to be released do not account for massive spread within a single country as they require geographical spread and for the particular epidemiology of coronavirus, which has a potentially long asymptomatic period (long growth ratio) and high rate of asymptomatic presentation (confirmation ratio).

As quoted in The Guardian, Olga Jonas, a senior fellow at the Harvard Global Health Institute, has labelled these payout conditions “obscene”. A former World Bank economist, Jonas said: “The whole mechanism is highly unfortunate. The objectives were to help the poorest countries respond quickly to outbreaks. Infectious disease spreads exponentially and the coronavirus has a very rapid growth rate. But the bonds only get triggered when the disease has spread for a long time.”

Jonas was damning in her critique of the pandemic bonds, saying that they were “so convoluted, it is not at all clear whether they will payout at all. It is too little, too late – and in this case, maybe never. What’s obscene is that the World Bank set it up this way. It waits for people to die.”

As reported in The Guardian, Bodo Ellmers, director of Global Policy Forum’s sustainable development finance programme, said: “The idea was that it would be a quick instrument, but it was set up with such stringent criteria that the risk for investors is very low. The design, taking the number of dead people as a criteria, is very cynical.”

A recent study authored by Dr Clare Wenham and Bangin Brim, both of the London School of Economics, was also critical of pandemic bonds. The report, entitled Pandemic Emergency Financing Facility: struggling to deliver on its innovative promise and published on 9 October 2019 in the British Medical Journal, highlights how the UN’s Central Emergency Relief Fund (“CERF”) and the WHO’s Contingency Fund for Emergencies (“CFE”) both released funds to mitigate Ebola outbreaks since 2016 in the Democratic Republic of Congo but the criteria for PEF to make an insurance payout, at the same time, were never met. Further, the report showed that only two outbreaks within the past 15 years would have met the criteria to activate PEF’s insurance payments.

Wenham and Brim argue that “the criteria for PEF’s insurance window are too stringent to mitigate risks posed to global health security”. In addition, whilst the value of the pandemic bonds has plummeted since the COVID-19 outbreak, an appraisal showed that, thus far, more money has been paid out to investors in coupon payments than to eligible countries facing disease outbreaks. As stated in the FT, by the end of February 2020, the World Bank had paid out more than US$96m in interest. Such coupon payments have inevitably led critics to suggest that pandemic bonds structurally favour investor interests over global health security.

Time for Reform

Lying behind the concept of pandemic bonds and the motivations of their investors is a desire to balance returns to investors whilst potentially achieving a societal good. Yet, it is clear that there are systematic and structural failings that have meant that pandemic bonds have fallen far short of their aspirational intentions.

However, abandoning the payout triggers in their entirety is not viable – they are a central part of the programme structure and vital when pricing the instrument and attracting investor interest. Scrapping the triggers would also simply increase the risk for investors and lead for calls for an even higher coupon. The criteria for future pandemic bonds, if there is any appetite following the events of the past few months, will be striking the balance between making the bonds societally useful and investable, and possibly using them with more pro-active and distinct geographic triggers. A better structure would be using “or” conditions instead of “and” conditions in the payout structure. This would allow for multiplicity of pandemic scenarios. The requirement that this bond currently only pays out under one model of pandemic is a key shortcoming and future issues should reconsider this feature.

The fundamental flaw then in the IBRD pandemic bonds is that the stringency of the payment triggers means that funds are not deployed until a pandemic is underway and it is simply too late. Three options to address this are:

Geographic Spread: The requirement in the payout conditions that the geographic spread of the virus extends beyond the country of origin should be scrapped. As Wenham and Brim highlighted, this creates “serious limitations” since outbreaks may occur in the centre of large countries, as we saw with COVID-19 originating in Wuhan in China’s Hubei province, with limited cross border traffic and “reach epidemic proportions before crossing an international border”.

Fatality Numbers: Rather than relying on abstract numerical triggers that are to some extent separated from the reality of an outbreak, the insurance window could instead rely on a steering committee. This is the structure used for the cash window of PEF and it allows for regular independent review and appraisal of outbreaks as they evolve to provide more dynamic and real-time fund dispersal.

Timings: The fact that the programme requires a 12 week window to have passed before the bonds payout has led many critics to label this as too little too late. When an outbreak is developing at an exponential rate, 12 weeks can mean the difference between containment and uncontrolled outbreak and such a requirement should be removed or at least significantly reduced.

Underpinning all of this is a need for greater flexibility and, perhaps, a greater element of bondholder control. Speaking to The Wall Street Journal Chin Liu, a portfolio manager at Amundi Pioneer in Boston, said his asset management company bought the pandemic bonds to diversify its catastrophe bond portfolio. “As an investor we do not want to lose money,” he said. “But then we also understand, if [the bond’s payout conditions are] unfortunately triggered, it benefits every single person - including ourselves - to keep the virus controlled.”

With more altruistic bondholders such as this, an option for the future could be to structure the bonds so that, in the event of a majority or super-majority of bondholders voting by extraordinary resolution, certain criteria could be waived and the funds deployed before all of the payout conditions are satisfied. This would have to be brought to the attention of fund investors to ensure the relevant fund manager has appropriate discretion to exercise these rights.

Alternatively, as suggested by Wenham and Brim, the COVID-19 outbreak may lead the World Bank to consider whether its goal of financing the battle against pandemics can be better served through other established mechanisms. For example, co-financing agreements with the already underfunded CFE and CERF would remove duplicative structures and allow for the faster deployment of anti-pandemic funds.


During a pandemic’s exponential phase, losing several weeks can be the difference between losing the fight and winning it. These pandemic bonds are unfortunately unlikely to provide the quick, flexible and innovative financing tool that they promised. The timing and structure of the payout conditions means that it will be likely that the insurance window will not payout and poorer countries are left without the anticipated surge funding. In future, it may also be better to pay out to a central response organisation – perhaps the WHO – for it to have greater flexibility in sending resources to locations where the need is greatest at the time when funding is released. Lag times between disbursement, receipt, utilisation, and deployment can be up to several weeks.

The COVID-19 outbreak, much like the 2008 financial crisis, will threaten the stability and credibility of global financial institutions. Pending the satisfaction of payout conditions for the current COVID-19 pandemic under the pandemic bonds, part of the new set of challenges facing the World Bank is to implement systemic reforms to its existing anti-pandemic and similar financing structures so as to ensure they fulfil their philanthropic goals more effectively, while remaining economically attractive to investors. Many lessons will be learned from the current COVID-19 outbreak – not least the optimisation of the trigger conditions and proceeds release timetables for pandemic bonds, which are highly likely to be revisited as a tool for future pandemic risk mitigation strategies.