The secondary market price for the tranche of the World Bank pandemic catastrophe bond that is most likely to pay due to the spread of the global coronavirus epidemic has fallen, while the low-risk tranche has also been reduced. .
As we explained last week, secondary market prices for pandemic disaster World Bank bonds are expected to drop after the spread of the coronavirus outbreak caused a second trigger condition to be met. .
At the right time, the layer of highest risk tickets is now significantly reduced, with some secondary notes on the price cards that we have seen looking for offers as low as 5 cents on the dollar for tickets, down from about 95% and a significant drop. of the average auction of 45 to 55 cents last week.
Which suggests that the market is anticipating an almost total removal of protection from this tranche, which, based on the growing number of cases, spread and confirmed deaths in a number of countries, seems a growing possibility.
The novel coronavirus epidemic (2019-nCoV or Covid-19) that started in the Chinese city of Wuhan, in Hubei province, now poses a significant threat to the pandemic BIRD CAR 111-112 cat bond transaction of 320 million dollars from the World Bank.
The pandemic cat bond provides a source of insurance, or reinsurance, as capital to support the Pandemic Emergency Funding Mechanism (PEF).
With the coronavirus outbreak appearing to become a qualifying event, under the terms of the World Bank’s Pandemic Catastrophic Bonds, the increasing severity of the situation has increased pressure on secondary market prices and the market expects the risk to increase. high The $ 95 million Class B tranche of pandemic bonds will suffer a total loss of principal.
Low-risk $ 225 million Class A tickets have also been slashed, with some price cards marking this slice of tickets for offers as low as 75-80 cents, reflecting a 20-25% discount.
As we explained in more detail last week, triggering the Pandemic Catastrophic Bonds requires a number of conditions to be met before payments are activated.
Among these are the duration of the epidemic being 12 weeks or more (not reached, it will be March 23), the number of deaths in the source country (satisfied for both brackets), the number of deaths exceeding 20 in at least one overseas country (met, now in two countries Iran, Italy and also South Korea), as well as a growth rate factor in terms of new confirmed cases at the end of the 12 week duration ( unknown at this point).
The outbreak does not need to be officially named a pandemic for tickets to be paid for, this is something that has been spread widely in the media and on social media but is wrong.
The Notes have a phased payment mechanism and the riskier layer has different payment rates that apply depending on the number of countries outside of the home country that see more than 20 confirmed deaths each. Currently, Iran, Italy and South Korea have reported more than 20 deaths from the coronavirus outbreak.
If more than 8 countries face more than 20 deaths each (not counting the source country of China), payment rates rise further, with the potential for a total loss of principal if that happens and there is more. 2,500 confirmed deaths in total (already encountered).
So it is the continued international spread and the number of deaths in over 8 countries reaching 20, while a growth rate factor continues to be above the relevant trigger condition after March 23 that could result in a 100% payment for class B tickets.
Class A notes, on the other hand, can only pay 16.67% of their principal for a coronavirus outbreak, with terms defining they could pay more for another type of pandemic.
The continued pressure on secondary prices is likely to intensify as the spread of the coronavirus outbreak appears unlikely to stop in the short term and the growing number of deaths seen overseas is expected to persist for the time being.
The risk of loss for investors holding pandemic catastrophe bonds continues to increase, in line with the continued global spread of this coronavirus outbreak.
We will keep you updated as needed to explain the risk posed to BIRD CAR 111-112 bonds in the event of a disaster related to the increasingly global coronavirus epidemic.