The World Bank has launched specialised bonds aimed at providing financial support to the Pandemic Emergency Financing Facility (PEF). 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, a facility created by the World Bank to channel surge funding to developing countries facing the risk of a pandemic, will provide more than US$500 million to cover these 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 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.
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).
Created in May 2016, 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 EUR50 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 “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 modeller, 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, Munich Re and GC Securities were also joint arrangers on the derivatives transactions.
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 10 years, the institution has executed approximately $1.6 billion in catastrophe risk transactions. M