The International Bank for Reconstruction and Development (IBRD) is a multilateral development bank and one of the five institutions of the World Bank. It is owned by its 189 member countries.
As part of the World Bank’s goal of ending extreme poverty, it works to support efforts by member countries of the Pacific Alliance – Chile, Colombia, Mexico and Peru – to manage risk associated with natural disasters and build resilience. The World Bank has a long track record of leveraging capital market instruments and is a leader in helping its member countries access risk insurance through the capital markets, including through the sale of catastrophe bonds.
The World Bank (via the IBRD) issued sustainable development bonds that collectively provide $1.36 billion in earthquake protection to Chile, Colombia, Mexico and Peru. Citi acted as joint bookrunner on the transaction, which consists of five classes of World Bank bonds: one each for Chile ($500 million), Colombia ($400 million) and Peru ($200 million), and two classes for Mexico ($260 million).
Each class has different terms, with those for Chile, Colombia and Peru providing coverage for three years and the classes for Mexico spanning two years. All are designed to cover earthquake risks with varying payouts based on the magnitude, epicenter location, depth and other characteristics of the quake: all rely on data provided by the US Geological Survey.
The sale marked the catastrophe bond debut for Chile, Colombia and Peru and was the largest sovereign catastrophe bond and the largest earthquake bond ever. The transaction demonstrated the resilience of the catastrophe bond market coming immediately after one of the largest catastrophe loss years in history in 2017. It also proved exceptional market demand for new insurance perils; each tranche of the Pacific Alliance issue was upsized and priced under the low end of initial guidance following significant oversubscription.
Members of the Pacific Alliance now have cost-effective insurance for disaster relief and other needs following a triggering earthquake event. By structuring the transaction as a joint issuance, countries benefited from cost savings for legal and other fees. The efficient risk transfer delivered by the catastrophe bonds has helped to build Chile, Colombia, Mexico and Peru’s resilience to natural disasters and improve the lives of their citizens, some of whom are just one disaster away from extreme poverty.