What the Coronavirus Means for Pandemic Bonds

Tracy Alloway (0:10)

Hello, and welcome to another episode of the Odd Lots Podcast. I'm Tracy Alloway. My co-host, Joe Weisenthal, is away this week.

So the entire world has been watching the outbreak of a deadly new coronavirus. And I have to say, I'm recording this podcast from my apartment in Hong Kong. And a lot of workers in the city have now been asked to work from home. And as I'm recording, there's this huge thunderstorm outside. So apologies if you hear it in the background. But I got to say, the entire atmosphere of Hong Kong at the moment feels kind of apocalyptic.

This morning, China just reported an extra 15,000 coronavirus cases after changing its methodology for diagnosis. And that takes the total cases to more than 50,000 in Hubei Province alone, the epicenter of the outbreak. Deaths are now well over 1,000 people, that's according to official numbers. And of course, there's a lot of doubt surrounding those official numbers.

And in between sort of obsessively checking my temperature all week and trying to find masks in Hong Kong, most of them are sold out. There's another thing that I've been obsessing over, and that is the World Bank's catastrophe bonds. Now, these aren't just any catastrophe bonds, cat bonds are typically linked to things like hurricanes and earthquakes and other natural disasters. But the ones we're going to be talking about today are a $320 million cat bond issued back in 2017 that's linked to pandemics. In fact, it's the first pandemic bond ever, and it was sold in response to the Ebola outbreak from a few years ago. And the bond basically backs the World Bank's pandemic emergency financing facility. The thing that is used to fund fighting these kinds of global outbreaks. Now, the idea behind the bonds is that they're a way for investors to bear some of the financial risk of a global pandemic. If an outbreak gets bad enough, then the bonds get triggered and their principal value gets paid into the World Bank's account to help fund containment efforts against whatever disease is currently wreaking havoc. In the meantime, investors get to earn interest.

I ought to say it's pretty good interest. The riskiest tranche pays about 11%, I think, over Libor, and the least risky tranche pays something like 7% over Libor.

Now, I just mentioned riskiest tranche and the least risky tranche. As you can imagine, there are different payout triggers for different parts of the bond, and they come into action at different points in time. Defining a pandemic isn't something that normally comes up a lot in finance. I think it's worth digging into these bonds to see exactly what those triggers look like, what the structure looks like, how people in finance think about global pandemics, and also what we can learn about pandemic containment efforts in general. And so today we're going to talk with one of the critics of the bonds, but also someone who has a lot of experience from an economics perspective with pandemics. Our guest is Olga Jonas of the Harvard Global Health Institute and also a former economist at the World Bank. Olga, thanks so much for coming on.

Olga Jonas (3:34)

Thank you very much. Very glad to be here.

Tracy Alloway (3:37)

So I guess my first question is, how did you get interested in this particular bond issue? Because I've seen you on Twitter and you tweet quite a lot about it. And of course, there aren't that many people out there on social media who are talking about pandemic bonds.

Olga Jonas (3:54)

Yeah. Well, I mean, the origin was that I was working, I'm a macroeconomist, but in 2005, I was in a central policy department at the World Bank. And it was at that time that the international response to AVN influenza and the pandemic threat from AVN influenza was launched and just was a fortuitous coincidence that I was in the department where this response was managed for the World Bank. So I got very interested in pandemics and pandemic risk because it's really very much underappreciated and it's not studied very seriously because between episodes of emergency, people forget about this risk and it's not something that they worry about, which is a mistake. And as we went through the response to AVN and pandemic influenza from 2005 to 2010, it became clear that the world is not ready for a pandemic, that there are just the capacities to prepare and to prevent such a catastrophic event are feasible, but there are just no there in the poorest countries. So we became very interested in sustaining the momentum from the AVN through response into, you know, building the capacities to prevent and to be better prepared for the next episode, which will necessarily come, as they say, you know, it's not a matter of if, but when.