Vaccine bonds: capital idea


Beating the pandemic requires a breakthrough in generosity as well as science. So says top vaccine funder Bill Gates: donations are still short of what is needed. But at least some of the money promised can be quickly deployed. A $500m vaccine bond underlines the role of capital markets in converting future aid flows into upfront funding. 

The money was raised for UN-backed vaccines alliance Gavi, which supports immunisation in developing countries, by the International Finance Facility for Immunisation (IFFIm). This financing vehicle was originally championed by former UK chancellor Gordon Brown to help meet the Millennium Development Goals. It has raised more than $6bn through vaccine bonds since 2006. The borrowing is backed by legally-binding pledges from governments to reimburse investors from future aid budgets.

The latest bond, offering a respectable 0.44 per cent yield, was heavily oversubscribed. It is likely to be just the start of a significant financing programme. IFFIm’s net debt was just 10 per cent of the present value of donor pledges at the end of 2019, far below the 70 per cent cap in its governance rules. Low gearing supports strong credit ratings, though those depend on the continuing creditworthiness of its largest contributors. The UK, France and Italy account for almost 90 per cent of pledges. 

The IFFIm can be counted a success. Could the same approach be extended into other areas, such as sanitation, education and climate? There are reasons for scepticism. The climate for international co-operation has deteriorated. The clarity and cost-effectiveness of vaccination as a mission is hard to match. Future finance facilities would not get such a high credit rating, if the credibility of pledges lessened as more aid was pre-committed. 

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For all that, investors are showing an unprecedented willingness to engage in social issues. Companies and governments issued €60bn of social bonds in March and April alone. Some of this labelling was opportunistic. But enthusiasm is real enough. There is real potential to harness it using the IFFIm. The need to mobilise substantial sums quickly is not limited to pandemics.

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