‘Pandemic bonds’ to pay out amid coronavirus outbreak, says DBRS

The coronavirus outbreak is likely to trigger payouts from so-called “pandemic bonds” issued by a unit of the World Bank to provide funding to developing countries to fight the spread of infectious disease, states DBRS Morningstar.

In a new report, the rating agency stated that, given the latest mortality data from the ongoing Covid-19 outbreak, it expects that US$132.5 million in pandemic catastrophe bonds to pay out.

The funding “will be channelled to eligible countries to mitigate the impact of the outbreak and might validate the need for market-based mechanisms to deal with pandemics,” DBRS said in its report.

A division of the World Bank established the Pandemic Emergency Financing (PEF) facility in 2017 following the Ebola virus outbreak in 2014-2015, which caused more than 11,000 deaths and “proved the need for an established funding mechanism to mitigate pandemics in developing countries,” DBRS noted.

Whether pandemic bonds will continue to attract investor interest remains to be seen.

DBRS said that the difficulty of defining trigger events makes it very tough to accurately value pandemic bonds.

Their diversification value is also questionable: “The current coronavirus outbreak is showing that the valuation of pandemic bonds is highly correlated with the performance of global financial markets when it matters most,” the agency noted.

Yet DBRS also said that investors typically remain interested in catastrophe bonds even after large natural disasters.

“We believe that a second round of pandemic bonds can address some existing concerns and remain a viable funding source for low-frequency but high-severity pandemics,” the agency stated.

In response to the coronovirus outbreak, the Federal Reserve earlier today cut its benchmark interest rate by 50 basis points — the first time the central bank has cut its key rate between policy meetings since the 2008 financial crisis and the largest rate cut since then.

Economists have been calling for the Bank of Canada to cut rates as well.

Staff

The staff of Advisor.ca have been covering news for financial advisors since 1998.