A new way of financing the fight against global diseases lured investors with annual returns of more than 11%. The deadly Ebola outbreak in Africa is highlighting shortcomings of so-called pandemic bonds in halting contagions.

After the worst Ebola outbreak on record, the World Bank two years ago began selling the high-yielding securities, modeling them on catastrophe bonds that pay out in response to insurance claims for events like hurricanes. The pandemic bonds, the first ever, are triggered by patterns in deaths from infectious diseases.

While the $320 million sale was hailed as a way to fight disease with finance, the funds are locked up by an arcane formula -- one that may rarely be satisfied by actual events. Bondholders are collecting rich interest payments even as the Democratic Republic of Congo is struggling to arrest an Ebola virus outbreak that’s killed more than 1,800 people the past year, and threatens to spill into neighboring nations.

“It was a lot of hype,” said Olga Jonas, a senior fellow at the Harvard Global Health Institute in Cambridge, Massachusetts, who was previously the World Bank’s economist coordinating avian and pandemic influenza. “They wanted to announce a new initiative that would impress the world.”

Mukesh Chawla, the World Bank’s senior adviser for pandemic financing, defended the bonds and explained they are part of an innovative financing mechanism designed to provide early, rapid funding to combat major disease outbreaks. It helps fill a gap after the initial outbreak and before large-scale humanitarian relief assistance can be mobilized, he said.

The World Bank sold the bonds, due July 2020, as part of an overall effort to aid countries in the early stages of a global contagion diseases like SARS, bird flu and Ebola.

In the two years since the Pandemic Emergency Financing Facility was established it “has been operating the way it was designed to operate,” said Chawla, who coordinates it.

The issue was a bondholder’s dream; with U.S. Treasury yields near record lows, it offers a return found only in shaky junk-rated bonds, sold from the best credit in the world and with a payout formula that was hard to trigger. The transaction was 200% oversubscribed, according to the World Bank.

Pandemic Arbiter
While other funds from the facility flow to relief organizations relatively easily -- after as few as 30 Ebola deaths in one country -- triggering its $425 million insurance fund is more complicated. A final arbiter, Boston-based AIR Worldwide Corp., scours WHO’s reports to determine whether the outbreak fulfills requirements for the payout.

The premiums for the bonds -- one of 11.5%, the other 6.9% -- cost about $36 million a year, paid by donor countries including Germany and Japan, Chawla said. It’s a relatively low price in the market for catastrophe bonds, he said.

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