A World Bank bond designed to deliver funding to help the world's poorest countries to tackle fast-spreading diseases has lost half its value as the coronavirus outbreak in China has fanned fears that investors could face hefty losses.
After the 2013-2016 Ebola outbreak that ravaged Sierra Leone, Guinea and Liberia and killed at least 11,300 people, the World Bank launched bond and insurance instruments under its Pandemic Emergency Financing umbrella in 2017 to establish a mechanism that would speedily deploy funds where needed.
However, the World Bank's two so-called pandemic bonds came under scrutiny after the second-worst Ebola outbreak on record.
The 2018 epidemic in the Democratic Republic of Congo raged for about a year and killed more than 2,000 people, but it failed to trigger the release of funds to help affected countries.
The bonds, issued by the World Bank's International Bank for Reconstruction and Development (IBRD), offer investors high coupons in return for the risk of having to forgo some or all their money in the event of pandemic outbreaks of a number of infectious diseases, with the funds channeled instead to countries in need of aid.
With the coronavirus outbreak having infected more than 74,000 people and claimed more than 2,000 lives, prices for the IBRD pandemic bond with the highest investment risk - the Class B notes - have come under increasing pressure.
Losses to investors depend on the number of deaths and geographical spread. In the most extreme case, a global outbreak - defined as more than 2,500 deaths across more than eight countries with a certain number of fatalities in each country - will wipe out the bondholder's entire investment.
Offer prices quoted by one broker have slipped as low as 45 cents in the dollar, while another is quoting 62.5 cents, market sources said. In the midst of the 2018 Ebola outbreak the bond traded at a little more than 70 cents.
"The market is clearly starting to price in a chance that the tranche most at risk could be affected," said an investor who holds some of the World Bank's pandemic debt.
"We all get the feeling that epidemics have become more and more frequent - we had SARS and Ebola and swine flu all within a short space of time."
The bonds issued by the IBRD are not only aimed at providing relief for outbreaks of coronavirus or Ebola, but also for pandemics caused by infectious diseases such as Marburg, Crimean-Congo hemorrhagic fever or Lassa fever.
Both of the bonds are often closely held and largely illiquid. Filings show that the riskiest of the two XS164110150=, maturing on June 15, is held by asset managers including Baillie Gifford, Amundi and Oppenheimer.
The second of the bonds - a $225 million issue XS164110117= - is also exposed to a coronavirus outbreak but considered less at risk because its different trigger criteria means bondholders face a loss of 16.7 percent.
For all the good intentions and the prospect that a payout to poor countries might be on the cards, the bonds remain under fire for failing to deliver sufficient or timely aid.
One point of contention is the length of time before a payout is triggered. In the case of a coronavirus outbreak for the Class B notes, this is 84 days from when the World Health Organization (WHO) publishes its first "situation report". In the current outbreak, that would be in mid-April.
Think tanks and some policymakers say the focus should be on shoring up healthcare systems and early detection facilities in vulnerable parts of the world that are already overburdened with cases of Ebola, measles, malaria and other deadly diseases.
"The money for these bonds could have been better spent in providing the WHO with funds or help strengthen healthcare provisions in poor countries at risk," said Bodo Ellmers, director of sustainable development finance at Global Policy Forum, an independent policy watchdog.
"It was an ideology-driven idea to get the private sector involved in humanitarian and emergency finance - and I think we have to say this has failed."
The World Bank said that if the activation criteria for the instruments were to be met, funding would be triggered to support countries.