Can the debt capital markets help address the coronavirus (COVID-19) crisis?

Can the debt capital markets help address the coronavirus (COVID-19) crisis?

What are social bonds?

Social bonds finance projects that directly aim to address or mitigate a specific social issue and/or seek to achieve positive social outcomes directed towards a specified target population. Social bonds are closely related to green bonds, which finance new and existing projects with environmental benefits, and sustainability bonds, which finance both green and social projects.

Guidelines for Issuing social bonds are set out in the Social Bond Principles.

Guidelines for issuing green bonds and sustainability bonds are set out in the Green Bond Principles and the Sustainability Bond Guidelines.

The guidelines provide an element of product consistency and quality control and are an important element in establishing investor confidence.

Why are social bonds relevant to the coronavirus (COVID 19) crisis?

The global coronavirus (COVID-19) outbreak is a social as well as a health issue. It threatens the well-being of the world’s population, especially the elderly and those with underlying health problems. Large parts of the world’s population are suffering, or will be suffering, from the resulting economic downturn. The effects of the crisis are likely to be felt longest and most deeply in underdeveloped parts of the world, where health care is more rudimentary, housing standards are not conducive to social isolation or other preventive measures, social services may be fragmentary or non-existent, and where economies are highly sensitive to cut-backs in demand from more developed countries.

What has been done so far?

So far, the running has been made by multi-lateral agencies.

On 11 March 2020, International Finance Corporation (IFC), a member of the World Bank Group), issued a USD$1bn three-year social bond that aims to support the private sector and jobs in developing countries affected by COVID-19 outbreak.

On 27 March 2020, the African Development launched a USD$3bn three-year ‘Fight Covid-19 Social Bond’ to help alleviate the economic and social impact that the Covid-19 pandemic will have on livelihoods and Africa’s economies.

On 31 March 2020, IFC published Illustrative Use-of-Proceeds Case Studies: Coronavirus, which aims to provide an illustrative reference by which issuers and bond market participants can evaluate the financing objectives of a social or sustainability bond in light of the coronavirus (COVID-19) epidemic and its global socio-economic impact. There are case studies for pharmaceutical and manufacturing companies and financial institutions.

In a parallel development, it is reported that Chinese regulators have encouraged the issuance of coronavirus (COVID-19)-linked bonds in the Chinese domestic market by reducing the approval process and encouraging state-backed banks to buy them. Issuers are required to spend at least 10% of the bond proceeds on combatting the epidemic.

What can be done in the future

It is likely that social bond issuance to address the effects of the pandemic will be lead by multi-lateral agencies, and that there will be significant issuance by sovereigns. Issuances by multi-lateral agencies can an effective way of mobilising private-sector investment—the issuing agency can offer investors the assurance of its own credit quality, together with its capacity to channel funds down into multiple smaller enterprises.

Sovereigns and governmental agencies may also likely to issue social bonds related to the pandemic.

It remains to be seen whether corporates will enter this market. Larger corporates with access to the bond markets may be able to issue social bonds to finance, for example, pharmaceutical research and manufacture, or the manufacture of vital equipment. Smaller scale corporates, especially those located in developing countries, are unlikely to be able to access the bond markets on their own and might be better off trying to obtain funds which have their source in a a multi-lateral agency social bond issuance.

And a note of caution—large scale social bond issuance by sovereigns and corporates in the developing world may address social problems today but result in debt crises in the future.

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