Pandemic bond: finance in the presence of the coronavirus

Rome, Mar 15 – In 2017 the World Bank issued i pandemic bond for a total of 320 million dollars. These are bonds that pay high coupons, but if the pandemic then starts, you risk all or part of the repayment. For this reason, the official declaration of the World Health Organization of a coronavirus pandemic also regards finance. In fact, anyone who buys an obligation buys part of the debt of a company (or a state) represented by a security, and only becomes a creditor. Therefore, in theory, unless a default (i.e. a bankruptcy) of the company or state in question, the creditor must recover the subscribed capital plus the interest provided for in the contract at a pre-established deadline. In this case, however, creditors could lose everything. Let’s see why.

The functioning of pandemic bonds

Between 2014 and 2016, when Ebola caused over 11 thousand victims in Africa, the World Bank devised a new and particular mechanism. In 2017, two bonds were issued for a total of $ 320 million expiring on July 15, 2020. In practice, we are talking about bonds aimed at providing the World Bank with the liquidity needed to help developing countries. In detail, as also found in a recent report by Dbrs Morningstar, the 320 million titles are divided into two tranches: the Class A, of 225 million, which pays a coupon of 7% and for which losses for subscribers have a cap of 16.67% (i.e. 37.5 million), and Class B, of 95 million, with an 11% coupon and the risk of total capital loss. If, as it seems, the coronavirus pandemic will trigger bond payments, total losses for subscribers will therefore amount to 132.5 million, although the amount actually available will rise to 195.8 million thanks to reinsurance mechanisms.

The river of dollars that will come from the bondholders will finance the Pandemic Emergency Financing Facility. The Pef, in fact, it is a fund that provides aid to nations affected by pandemics. Money is collected in two ways: through an insurance method, linked to the bonds we are talking about, or “on cash” and that is through the contributions of rich countries and organizations such as the World Health Organization (WHO).

The “halter” clauses: the case of the Congo

In the recent past, investors have not lost a single penny. Let’s see why. First of all, it is necessary to certify that it is a pandemic, or an epidemic with a tendency to spread everywhere, that is, to rapidly invade vast territories and continents. It can be said to be achieved only in the presence of these three conditions: a highly virulent organism, lack of specific immunization in humans and the possibility of transmission from man to man. However, all this may not be enough to trigger reimbursements.

Federico Giuliani of Insideover reminds us of the case of the Congo: “In 2018 Ebola caused over 2,000 victims in the Democratic Republic of the Congo but, since there were at least 20 other victims in a second country, the pandemic bonds did not unravel a only money. ” Warning: we are talking about operations that take place in sunlight. No conspiracy. Pandemic bonds are part of a larger segment of bonds – i Catastrophe bond – which are worth around $ 37 billion worldwide. The mechanism is similar: investors receive a very high coupon, but if the event covered by the Cat-bond occurs, as it is called in jargon, all or part of the amount invested is lost.

The hedge fund that bet on the “stock market crash”

The relationship between disaster and big finance is not limited to the use of pandemic bonds. For example Bridgewater, the largest hedge fund in the world, went on the defensive by signing insurance contracts (put options) with the aim of protecting its assets (about $ 150 billion in shares and financial investments). The put options allow you to sell securities at a set price and by a certain date. Basically, if a manager foresees the arrival of a negative cycle, he can protect himself by signing agreements for the sale of securities before the prices fall. The decision was made by the fund’s founder Ray Dalio, who explains that this operation “does not arise from mistrust, but is part of a particular management strategy at the service of its customers”. Dalio’s choice could raise disturbing questions about the birth and spread of the Corona virus. In reality, the choice of the American tycoon was probably dictated by reasons that have nothing to do with the epidemic.

For at least two years, many analysts have argued that most share prices have been overestimated and overtaken by years of low interest rates and quantitative easing. So many expected the thump of the stock exchanges. Surely Covid-19 has contributed to damage the world economy. Some big financials are benefiting from these modern plagues but we cannot consider him the bearer of the third millennium. Since 2017 it was known that Coronavirus was a very probable occurrence, and for which emergency plans had to be prepared. Unfortunately, no politician has prepared adequate tools to deal with the pandemic. The pneumatic void left by those elected to govern us has been filled by the bureaucrats of globalism. The damage to our economy is currently very high. A lot of liquidity is needed to encourage recovery.

In light of what has been said, conspiracy is a luxury that we cannot afford also because, in the vast majority of cases, it is the alibi of the ignorant. Political commitment becomes futile if there is a world government that decides for all of us. This is why it is better to stay at home on the sofa.

Salvatore Recovery