Corona bonds: What are they and why do they matter?

The COVID-19 pandemic has spawned a new bond label, so-called "corona bonds," opening opportunities not only for sovereign and supranational issuers, but also for corporates.

The COVID-19 outbreak has put the brakes on the global economy at large. When the virus epicentre moved to Europe, issuance of bonds plummeted across European financial markets, with no exception for the green, social and sustainability formats. However, an interesting development has occurred in the last couple of weeks: a record increase in the supply of social bonds and the use of a new format – corona bonds.

Corona bonds, or COVID-19 bonds as they are also called, aim to mobilise capital to fight the pandemic and its negative social consequences. Year to date, more than USDeq 19 billion has been issued using the corona bond format, attracting significant attention and interest from investors.

What is a “corona bond”?

A “corona bond” can take the social bond label or be a non-labelled thematic bond, with proceeds earmarked for fighting the effects of COVID-19. As with regular social bonds, the issuer discloses use of proceeds and commits to reporting regularly on progress and impacts. The International Capital Market Association (ICMA) has put together useful guidance on issuance of corona bonds, which is available here.

Why are corona bonds important?

Funds will be required for different stages of the crisis, ranging from acute needs such as healthcare resources and preventing small businesses from going bankrupt, to more long-term uses such as kick-starting and supporting the wider economy as societies return to normal.

Corona bonds offer a relevant and credible way to channel private and public capital towards fighting the COVID-19 crisis. By issuing a corona bond, where proceeds are clearly earmarked to fight the pandemic, issuers provide socially-oriented investors with an interesting investment opportunity. Labelled green and social bonds have laid the foundation, with the Green Bond Principles and Social Bond Principles being instrumental in this development. Issuers and investors are both used to a certain level of quality and transparency, which will extend to corona bonds.

We have already seen numerous issuers successfully using the corona bond format. The supply has come from sovereigns and supranationals, as summarized in the table below.

Examples of corona bonds:

Issuer Type Tenor Issued Amount Announced Use of Proceeds (related to the pandemic)
European Investment Bank Sustainability 3y

8Y

SEK 3bn

EUR 1bn

March 2020

April 2020

Financing areas directly related to the fight against the COVID-19 pandemic. Support to national health authorities and hospitals, laboratory facilities and networks.
African Development Bank Social 3y

3y

USD 3bn

SEK 2.5bn

March 2020

April 2020

Support and financing to countries’ and businesses’ fight against COVID-19.

Support and financing to countries’ and businesses’ fight against COVID-19.

Nordic Investment Bank Thematic 3y

3y

EUR 1bn

SEK 4bn

March 2020

April 2020

Finance projects that aim to alleviate the social and economic consequences of the pandemic in the Bank’s member countries and eventually support the recovery process of the countries.
International Finance Corporation Social 3y

5y

USD 1 bn

SEK 3 bn

March 2020

March 2020

Supporting underserved communities in developing countries, including countries affected by the coronavirus.
Inter-American Development Bank Thematic 5y

5y

USD  2bn

USD  4.25bn

March 2020

April 2020

Support the immediate public health response, the safety nets for vulnerable populations, economic productivity and employment, fiscal policies for the amelioration of economic impacts.
Council of Europe Development Bank Social 7y EUR 1bn April 2020 Support CEB member countries in mitigating the social and economic impact of the ongoing COVID-19 crisis
Indonesia Thematic 10.5y

30.5y

50y

USD 1.65bn

USD 1.65bn

USD 1bn

April 2020

April 2020

April 2020

Partially fund the country’s COVID-19 relief and recovery efforts

Relevant frameworks and target groups for corona bonds

As shown above, the corona bonds are supporting different activities and are structured in different ways. Some of the bonds are social bonds, some sustainability bonds and others non-labelled thematic bonds. Some of the above issuances have been under existing social bond frameworks, some under a new one and others under no framework.

One issue that often comes up in the context of social bond frameworks is how to define the so-called “target population.” Issuance of a social bond requires a defined target group, which will benefit from the proceeds. It is often said that “green is global, while social is local,” yet the current pandemic is very much a global issue that affects everyone. This means that some projects will benefit the general public, which should then also be the defined target population in the framework for that particular category.

The International Capital Market Association (ICMA), together with the International Finance Corporation, has developed a collection of case studies to provide guidance and illustrative examples for the use of proceeds as well as the definition of target population when issuing a corona bond. The examples include projects such as research and development of vaccines and other medications, with the general public as the target group, and loans to small businesses hit by the pandemic, with small businesses and employees as the target population. Find more examples here.

Future development

The social bond format has generally been seen as challenging, due of the wide range of opinions regarding what is social and what is not. However, with issuances related to the corona crisis, we expect to see less ambiguity regarding the use of proceeds definition. Denise Odaro from the IFC explains it well in the ICMA podcast, “Social Bonds on the rise”:

“The reason green bonds have been such a successful product is the momentum around climate change. In the social space, we all have our ideas about what social issues are, and that often leads to lengthy debates. However, this current pandemic has gravely affected public health and brought the global economy pretty much to a standstill. No one is contesting whether this is a social issue. No one can turn a blind eye.” (edited for length and clarity)

The corona bond format opens up opportunities, not only for sovereigns and supranationals, but also for corporates, which may have struggled to define the social contribution or relevant target population and therefore refrained from issuing social bonds in the past.

 

About the authors:

Ebba Ramel, an analyst in Nordea's Sustainable Bonds team

 

Ebba Ramel is an analyst in Nordea’s Sustainable Bonds team.

 

 

Jacob Michaelsen, Head of Nordea Sustainable Finance Advisory

 

Jacob Michaelsen is Head of Sustainable Finance Advisory at Nordea.

The information provided within this website is intended for background information only. The views and other information provided herein are the current views of Nordea Bank Abp as of the date of publication and are subject to change without notice. The information provided within this website is not an exhaustive description of the described product or the risks related to it, and it should not be relied on as such, nor is it a substitute for the judgement of the recipient.

The information provided within this website is not intended to constitute and does not constitute investment advice nor is the information intended as an offer or solicitation for the purchase or sale of any financial instrument. The information provided within this website has no regard to the specific investment objectives, the financial situation or particular needs of any particular recipient. Relevant and specific professional advice should always be obtained before making any investment or credit decision. It is important to note that past performance is not indicative of future results.

Nordea Bank Abp is not and does not purport to be an adviser as to legal, taxation, accounting or regulatory matters in any jurisdiction.

The information provided within this website may not be reproduced, distributed or published for any purpose without the prior written consent from Nordea Bank Abp.

Related articles