Enterprise Explains: Corona bonds
Enterprise Explains: Corona bonds. The European Union made headlines last month after its maiden issuance of so-called “corona bonds” set a new record for the largest ever order book in the global bond markets. Falling under the rubric of ‘social bonds,’ pandemic-linked securities have this year enabled countries and companies alike to stay afloat, channel funding into supporting healthcare services, and finance the development of vaccines.
The idea of using debt finance to provide support during pandemics isn’t a 2020 innovation. Inspired by the 2014 Ebola outbreak in West Africa, the World Bank in 2017 launched the first ever pandemic bond; a fixed-income security whose proceeds would be earmarked exclusively for developing countries in the event of a pandemic. Using its new Pandemic Emergency Financing Facility (PEF), the bank pledged to channel USD 500 mn to low income countries over five years via the issuance of bonds and derivatives, with Japan and Germany on board to cover the premiums.
The PEF has been deployed in response to the covid-19 outbreak. By September more than USD 195 mn had been disbursed to 64 low-income countries to bolster the capacity of health authorities to contain the spread of the virus.
Enter the EU. The European Union has become a standard bearer of sorts for the corona bond concept. Despite long-standing opposition to joint debt issuance from the bloc’s fiscally hawkish members, the EU finally agreed to launch a EUR bn programme in July that will channel funding to the countries hardest hit by the pandemic and accompanying economic downturn. The bloc plans to issue EUR 100 bn of the bonds under its SURE programme, EUR 17 bn of which were sold in an offering last month which received “outrageous demand” from international investors.
Things get a little more nebulous when it comes to corporate corona bonds. Fuelled by huge investor appetite for the securities, USD hundreds of bns of corona bonds have been issued by companies this year. This may be more fiction than fact though: the Wall Street Journal suggests that some companies have been more interested in capitalizing on the corona bond name than actually channelling funding into work related to the pandemic. Companies such as Pfizer, Bank of America and the Bank of China have all claimed to issue covid-linked securities this year, but there is little consensus on the definition of what a corona bond actually is, and no system exists to track how the proceeds are used.
Herein lies the issue for corona bonds: While an international framework like the one agreed by the EU obliges sovereigns to report on how the funds are being used, there is no such structure governing corporate issuance. There are no transparency regulations or reporting requirements that compel companies to fully disclose where the money is going, or even whether it’s being used for sustainable or social purposes. For investors who put a premium on trust and social responsibility, this could be an issue.