Cover story – Covid bonds


Who looks after children when schools are closed and parents are supposed to be working? How do we as a society care for our elderly? Are our healthcare systems viable? Which jobs really are essential and must continue when everyone else is staying at home? Can small businesses survive the lockdown without defaulting? Are we facing mass unemployment? The Covid-19 pandemic has not just ground the global economy to a halt, it has also opened up a barrage of pressing social questions. Most of these challenges have already been present but persistently ignored, much like a leaking tap it could eventually produce a flood if not fixed. The damage caused by the virus has sparked an unprecedented demand for capital. Healthcare infrastructure, the develop- ment of new vaccines and medication will need to be funded while service-oriented businesses are struggling for a financial lifeline. Just as the virus originated in China, Chinese capital markets were also first to respond to the crisis. In mid-February, there was already a flurry of domestic Chinese bond issuances underway, contributing to funding a multitude of Chinese firms, from pharmaceuticals to car plants. The “virus bonds” were given a regulatory fast track process to speed up the issuance and to help alleviate the immediate impact of the crisis. At the same time, only a tenth of the pro- ceeds had to be allocated to containing and preventing the pan- demic, according to China’s regulator, the National Association of Financial Market Institutional Investors (NAFMII). Issuers include airlines, glass manufactures and even pig meat producer Muyuan Foods, which pledged to ensure adequate meat supply in the midst of the crisis. By the end of March, NAFMII said it had supported 193 domes- tic issuers, raising a total of Y173.3bn (£19.2bn). In late Febru- ary, the Bank of China started taking Covid bonds offshore by launching a two-year dual currency bond through its Macau branch, the first social bond issuance by a Chinese issuer tar- geting international investors, according to law firm Allen Overy, which advised on the transaction. As the virus spread across the globe, so did the Covid bond label, which soon turned out to be a popular new strategy to market fixed income products, from corporate- to emerging- and frontier market debt. Measuring the size of the market is proving to be difficult. Research by one asset manager puts it at more than $65bn (£51.5bn) and predicts that it will hit the $100bn (£9.3bn) mark, if current issuance levels continue. Another asset manager contradicts this by estimating that the market exceeded $150bn (£119bn) in early June. No matter the confusion, this is a big market considering that it did not exist at the start of the year. Issuers now range from the Republic of Indonesia to the Nor- dic Investment Bank and the African Development Bank.


22 | portfolio institutional July 2020 | issue 94


Covid bonds tend to fall under the broader label of social bonds which has received growing popularity in recent months. While issuance levels of green bonds slowed in the immediate aftermath of the crisis, the supply of social and sustainability bonds increased sharply, with the combined social and sustain- ability bond issuances overtaking green bonds for the first time in April, according to Refinitiv. But as the case of issuances in China illustrates, the use of pro- ceeds is far from straightforward and not all Covid bonds fall under the social bond label.


The most common framework for social bonds are the Interna- tional Capital Market Association’s Social Bond Principles,


Assuming they have been properly structured, Covid bonds should be well uncorrelated with markets.


Kevin Wesbroom, Capital Cranfield


Page 1  |  Page 2  |  Page 3  |  Page 4  |  Page 5  |  Page 6  |  Page 7  |  Page 8  |  Page 9  |  Page 10  |  Page 11  |  Page 12  |  Page 13  |  Page 14  |  Page 15  |  Page 16  |  Page 17  |  Page 18  |  Page 19  |  Page 20  |  Page 21  |  Page 22  |  Page 23  |  Page 24  |  Page 25  |  Page 26  |  Page 27  |  Page 28  |  Page 29  |  Page 30  |  Page 31  |  Page 32  |  Page 33  |  Page 34  |  Page 35  |  Page 36  |  Page 37  |  Page 38  |  Page 39  |  Page 40  |  Page 41  |  Page 42  |  Page 43  |  Page 44