The World Bank’s pandemic bonds, which could provide $132.5m of funds to countries within the International Development Association (IDA) and International Bank Reconstruction and Development (IBRD), will be triggered and paid out – but only if reported cases of coronavirus continue to escalate rapidly in the developing world, as cases in China and Europe show welcome signs of plateauing.
Credit ratings agency DBRS Morningstar released a note late last week explaining that the World Bank announced on 9 April that the pandemic bonds had not been triggered as of 23 March. It added that the last condition to be met in order to trigger the bonds is the exponential growth rate of Covid-19 cases to be positive for IDA/IBRD countries in the 12-week rolling period preceding its calculation.
The number of cases continues to rise globally but the calculation period, from 31 December 2019 to 23 March 2020, is heavily influenced by the jump in cases in China and subsequent stabilisation by mid-February, said the agency. Based on the trend in the number of coronavirus cases in IDA/IBRD countries, the calculated growth rate could turn positive in late May, when the impact of the trajectory of Chinese cases will drop out from the rolling calculation period, it added.
“The trajectory of the growth rate for the number of cases in IDA/IBRD countries will depend on a number of factors, including broad accessibility to testing in the developing world and the effectiveness of social distancing measures,” said Marcos Alvarez, senior vice-president and head of insurance at the credit ratings agency.
“Based on the recent evolution in the number of cases in IDA/IBRD countries and our calculation of the growth rate using the prescribed formula, DBRS Morningstar estimates that it is still possible that the pandemic bonds will be triggered before their maturity,” he continued.
If all the conditions are met, Class-A pandemic bonds will lose 16.67% of the principal ($37.5m) while Class-B bonds will lose 100% of the principal ($95m), for a total of $132.5m. These resources will then be distributed among IDA-eligible countries.
“The last hurdle for the bonds’ payout to be triggered by the ongoing coronavirus pandemic is the growth rate of eligible cases. According to the prospectus of the bonds, the (exponential) growth rate needs to be positive based on a rolling window period of 12 weeks. The first calculation period ran from 31 December 2019 (when the World Health Organization reported the first coronavirus cases) until 23 March 2020. The next rolling period for the purpose of calculating the growth rate spans from 13 January 2020 to 6 April 2020, with the starting and ending date of each 12-week successive window period moving forward by two weeks,” explained DBRS Morningstar.
“Another feature of the growth rate calculation process is that it only includes total cases in IDA/IBRD countries, rather than total cases in the entire world. Thus, while the number of cases in IDA/IBRD countries was less than 400,000 as of 12 April, the number of cases in the rest of the world hovered around 1.4 million as of the same date. Only three IDA/IBRD countries exceeded 50,000 coronavirus cases each on 12 April: China, Iran, and Turkey,” it added.
The prospectus for the bonds explains that the growth rate formula basically averages the exponential growth of five periods of two weeks and subtracts a multiplier of the sample standard error. The credit ratings agency said it understands that the calculation of the growth rate is currently being affected by the explosive growth in the number of cases that developed in China up until mid-February. However, the number of coronavirus cases in China has relatively stabilised around the low-80,000s level since then and in turn has forced the exponential growth rate to be negative for a couple of two-week periods.
“In DBRS Morningstar’s opinion, this explains why the calculated growth rate was negative in the 84-day period from 31 December to 23 March, as determined by the calculation agent. However, we estimate that the influence of the evolution of coronavirus cases in China will mostly drop from the calculation of the growth rate in late May, when the rolling period will run from 24 February to 18 May and will be mostly driven by the growth of cases in other countries. For instance, the slight growth in the number of cases in China during March contrasts with the rapid increases we are now witnessing in Iran, Brazil, Turkey, Russia and Ecuador— all of which are IDA/IBRD countries,” it stated.
The agency said the trajectory of the growth rate for the number of cases in IDA/IBRD countries will depend on a number of factors, including broad accessibility to testing in the developing world and the effectiveness of social distancing measures. IDA/IBRD countries do account for a large proportion of the world’s population but the number of cases in these countries is relatively lower than in developed countries, because coronavirus testing is less prevalent.
DBRS Morningstar said that once these countries apply broader testing, the number of cases is likely to raise, especially given their high population densities, which might facilitate coronavirus transmissions in some cases. This could, however, be countered by increasing enforcement of social distancing or even the availability of a coronavirus vaccine.
“Based on the recent evolution in the number of coronavirus cases in IDA/IBRD countries and our calculation of the growth rate using available data provided by the European Centre for Disease Prevention and Control, DBRS Morningstar estimates that it is still possible that the pandemic bonds will be triggered before their maturity. The weekly growth rate in IDA/IBRD countries has increased since early March, while the same indicator for the rest of the world seems to be on a downward path since late March. As some health experts have indicated, developing countries could be four to six weeks behind developed countries in the infection curve overall, which supports the expectation that cases will continue to grow exponentially for some time in IDA/IBRD countries and trigger a payout of the bonds. This task now resides with the calculation agent of the bonds, who will review the growth rates every two weeks,” concluded the agency.