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Pandemic Bond Investors Face the Possibility of a $500 Million Wipe Out In Weeks Ahead

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It sounds like a great idea--constructing a bond to help the poorest of nations recover in the event of a global pandemic.

To investors, it sounded like a promising investment yielding massive profits--either 6.9% or 11.5% in annual interest payments.

After all, despite regional epidemics occurring every now and then, what’s the real likelihood of a global pandemic ever taking place, right?

Well, in just two years after the World Bank had issued “pandemic bonds” in response to the Ebola outbreak, the Coronavirus Pandemic may trigger payments to certain designated countries.

And if fatalities rise within those designated countries, investors who had previously made outsized profits on bond coupons may now face a massive wipeout of their principal investment.

What is the World Bank’s Pandemic Bond?

In 2017, the World Bank issued two tranches of bonds worth around $425 Million to relieve poor to middle-income countries in the event of a major epidemic or global pandemic.

Here’s what Jim Yong Kim, the World Bank’s then-president said in 2017, announcing the pandemic-linked bonds:

“We are leveraging our capital market expertise, our deep understanding of the health sector, our experience overcoming development challenges, and our strong relationships with donors and the insurance industry to serve the world's poorest people, potentially save millions of lives."

The bonds are divided into two tranches: Class A bonds offered a 6.9% annual payout, while Class B bonds paid around 11.5% annually. Together, the bonds are worth around $425 Million.

Payout relief to beneficiaries will be triggered upon meeting a set of criteria as shown in the Euromoney chart below:

The coming reporting date to determine whether all of the criteria had been met is April 9, 2020.

So, where’s the problem? Like insurance companies, bond investors were betting that the scale or severity of any future epidemic or pandemic would not exceed levels that would put their principal investment at risk.

If there is a major outbreak, the bank’s payout to afflicted countries would represent a minimal portion of the entire debt holding, making such relief sustainable for both the beneficiaries and investors.

Investors were not counting on a contagion that would cause their bonds to default.

The coronavirus pandemic, however, changed everything, challenging the stability of the bonds, putting investors at the risk of losing hundreds of millions of dollars.

  • Class A bonds will go into default if any single designated( IBRD or IDA) country reports 2,500 deaths.
  • Class B bonds, which have a lower bar for the debt to trigger, will go into default after 250 deaths.

At the time of writing, there’s been a total of 1,015,403 coronavirus cases worldwide (active and closed cases), killing 53,030 people, according to John Hopkins COVID-19 map.


The US is the new pandemic epicenter.

President Trump wants to re-open the country in a few weeks. Should this fail, we can expect to see a second or even third wave of infections, prompting governments to enforce additional lockdown orders, the likes of which will virtually guarantee an economic depression, assuming that we duck one now as a result of our current lockdown.

This morning, Dr. Fauci announced even more dismal news-- that new waves of COVID-19 infections might occur seasonally, making coronavirus infections a regularly-occurring threat during flu seasons.

Meanwhile, the risk of pandemic bonds defaulting grows exponentially by the day, its investors facing a potential $500 Million wipeout once the bonds trigger.

Amidst this chaos, gold has soared above 1,620 an ounce. Silver hasn’t performed as well, though it’s currently trading at 14,50 an ounce.

With regard to silver, its price doesn’t matter much. Should the dollar’s value end up compromised (and there’s no way that infinite QE will not leave its erosive mark), there may come a time when you’ll want to trade your silver coins for groceries to feed your family.

When that time comes, regardless of how mainstream investors see silver now, silver as “sound money” simply becomes “money.” And that’s all that counts.

Bank Failure Scenario Kit - sm2



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All articles are provided as a third party analysis and do not necessarily reflect the explicit views of GSI Exchange and should not be construed as financial advice.

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