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

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.

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:

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 is an analyst in Nordea’s Sustainable Bonds team.

Jacob Michaelsen is Head of Sustainable Finance Advisory at Nordea.