The bond has come under harsh criticism from some disaster-aid specialists for the lag time required in meeting requirements for a payout.
The $320 million bond, issued in 2017 by the World Bank, is costing its investors losses of $132.5 million in principal. The payout is scheduled for Friday, according to the World Bank.
The money to the impoverished nations is on top of $63.3 million in other funds paid out in April as part of the same World Bank pandemic program, bringing total proceeds to $195.8 million. That is the maximum amount for a coronavirus event under the arrangement.
The distribution is taking place roughly two months after the World Health Organization declared Covid-19 a global pandemic. All total, the pandemic has killed more than 300,000 people globally and sickened 4.4 million people, according to data from Johns Hopkins University. More than 4,600 deaths have occurred in the potential beneficiary countries, the World Bank said.
The security is among a larger universe of securities known as “catastrophe bonds,” or “cat bonds” for short, that have been around since the 1990s but turned into a closely watched experiment as Covid-19 spread world-wide.
Some delays were built into the bond’s design to allow time for reliable data to become available, investors and analysts said. Other issues surfaced as critics turned their focus to why money wasn’t distributed sooner. Many poor countries have had trouble obtaining enough coronavirus tests to prove they are experiencing cases, feeding into problems meeting the payout requirements.
“From an investor’s perspective, the transaction and reporting worked well, but we acknowledge that the aim to provide fast funding in response to an outbreak wasn’t achieved and could be improved,” said Dirk Schmelzer, a partner at Plenum Investments AG in Zurich. It manages about $400 million in catastrophe bonds and owns the less risky of two tranches of the pandemic bonds.
The World Bank said the $195.8 million would be spread across dozens of the world’s lowest-income countries. The amounts to be received are determined by population size and reported cases, with a minimum of $1 million and maximum of $15 million per country. A heavier weight is given to countries classified as “fragile or conflict-affected,” the bank said.
The majority of the bond’s eligible beneficiaries are African countries, including Ethiopia, Ghana, Kenya, Nigeria, Tanzania and Zimbabwe. Outside of sub-Saharan Africa, countries including Afghanistan, Bangladesh and Cambodia are also eligible.
The funds can be used for Covid-19 purposes including health workers, drugs, lifesaving medical equipment such as personal protective equipment, nonmedical gear and temporary care centers, the World Bank said.
The investors in the less-risky portion of the pandemic bond, which pays 6.9% annually, will lose 16.7% of their principal, while the riskier tranche that had paid 11.5% annually will lose all their principal.
Despite the losses, Mr. Schmelzer said that “offering disaster relief funding through catastrophe bonds, be it for pandemic events or natural catastrophes, is a great way to support developing countries and strengthen their resilience.”
He would consider buying additional pandemic bonds for their “diversification benefit” in a portfolio dominated by natural-catastrophe bonds. But his firm has a strict allocation limit, he said, because “we assume that pandemic events affect global financial markets, and pandemic bonds are therefore highly correlated to financial market risk.”
Cat bonds were launched in the 1990s as a vehicle for tapping the capital markets for more insurance capacity in the wake of costly Hurricane Andrew in South Florida. They have expanded to include other types of perils.
Overall, the bonds have been popular with investors such as pension funds and endowments, as they typically offer higher returns than many other debt instruments in a low interest-rate environment. Another appeal: In general, hurricane bonds have performed well in recessionary and stressful periods, even as some other high-yield debt underperformed, analysts said.
One challenge for pandemic bonds going forward is that the government-ordered shutdowns to halt the spread of Covid-19 have led to dire economic conditions. So as stocks, high-yield corporate bonds and other investments take a hit, owners of any future pandemic bonds would run the risk that they lose principal, too.
“We saw institutional investors losing part or all of their principal exactly at the same time when most of their investment portfolios were suffering huge losses,” Marcos Alvarez, head of insurance at credit-rating firm DBRS Morningstar, said of the World Bank bonds.
Still, some securities and brokerage firms that help put the transactions together believe pandemic bonds will come through the World Bank experiment as a niche investment with decent prospects for future issuance.
Aon Securities Chief Executive Paul Schultz anticipates demand in the future, though the securities will likely be designed and sold differently. He sees companies hardest hit by Covid-19, such as airlines, hotels and other companies in the travel and hospitality sectors, as potential sponsors. They would use them as financial protection against disastrous pandemic outcomes in the future.
The World Bank said it isn’t planning to renew the bonds after the current ones mature in July 2020.