The World Bank (IBRD) has launched a new type of bond that promises to fight the outbreak of global pandemics while paying investors a decent yield.
Although investors put their money in the bond and earn interest, the bond´s capital is used to create an emergency fund.
Developing countries will be able to act more quickly and effectively to fight the impact of deadly outbreaks such as Ebola. It could potentially save millions of lives.
Known as the Pandemic Emerging Financing Facility (PEF), more than $500m will be readily available to cover developing nations against the risk of outbreak.
While it is the first time that pandemic risk in poorer countries has ever been transferred to financial markets, the concept has proved an instant success.
EBRD developed the new pandemic bonds in association with reinsurance firms Swiss Re and Munich Re.
The IBRD said the initiative had been “200% oversubscribed” with $425m raised through bond and derivative securities.
Its Class A pandemic bond, which covers against outbreaks of flu or coronavirus, pays investors an annual coupon of 6.5% above prevailing 6-month US dollar LIBOR.
Meanwhile, the Class B pandemic bond, which protects against a wider range of diseases and presumably puts the underlying capital at greater risk, pays investors an annual coupon of 11.1% above 6-month US dollar LIBOR.
Pandemics covered by the latter include Filovirus, Coronavirus, Lassa Fever, Rift Valley Fever and Crimean Congo Hemorrhagic Fever.
Both bonds will mature in July 2017, at which point investors may be able to get their entire original investment repaid, provided none of the events covered have occurred.
Capital at risk
As investors run the risk of losing part or all of their money, the bonds are being issued under the IBRD’s “capital at risk” programme. The IBRD has already issued similar securities to deal with other types of catastrophe in poorer countries.
The financing to eligible countries will only be triggered when an outbreak is deemed to have reached certain thresholds of contagion, based on World Health Organisation data.
Jim Yong Kim, president of the IBRD, said the fund had the potential to save millions of lives as well as entire of economies from one of the greatest “systemic threats” known to man.
“We are moving away from the cycle of panic and neglect that has characterised so much of our approach to pandemics. Drawing on lessons from the Ebola outbreak in West Africa, the facility will help improve health security for everyone,” said Kim.
The IBRD estimates that the new fund would have saved 90% of the 11,000 people killed in the Ebola outbreak of 2014. More effective action could have been taken in the early stages of contagion.