The Covid-19 pandemic has affected nearly every country around the world. As of Tuesday, more than 3m people have been infected and more than 200,000 people have died. Billions more are in lockdowns, driving economies to a halt and fuelling a rise in unemployment. The true impact of the virus is yet to be seen as countries continue to fight the outbreak, but the devastation is undeniable.
Governments have been quick to provide stimulus measures to keep their economies moving, and provide for citizens that are unable to work.
The likes of the Republic of Indonesia have also turned to the dollar bond market to raise funds for such efforts, selling Covid-19 relief bonds. These bonds, which generally carry a 'social' or 'sustainability' bond label, are designed to provide cash for stimulus, while also meeting the United Nations’ pre-existing sustainable development goals (SDG). Funds designated for job creation and access to healthcare, among other uses, meet the SDG standards.
Governments, supranationals and agencies have traditionally been at the forefront of the response to any economic crises. This was seen during the global financial crisis more than a decade ago, when governments had to prop up the economy, and particularly the banking sector.
But this crisis caused by a pandemic is very different. Sure, the MDBs are still leading the way in Covid-19 related funding. But Asia’s banks, helped in part by regulations in place over the past decade, are on fairly stable footing. They are not in distress, but are instead in a position to help the over-stretched public sector.
As Kookmin's $500m five year bond showed, privately-owned banks can raise money to support broader initiatives. In Kookmin's case, the proceeds from its deal are being used to provide loans to small and medium enterprises that have been, or will be, affected by Covid-19.
Korea’s Shinhan Bank, also privately controlled, similarly raised $50m through a private placement in March to provide funds to stem the spread of the virus and support SMEs. Earmarking bonds for healthcare related uses, perhaps by providing loans to companies switching to making medical devices or buying and providing protective equipment, are also ways for the private sector to combat the fallout of Covid-19.
Private support
Just like there is a necessity for private funds to battle the effects of climate change or to build sustainable infrastructure, there is an acute need for private money to support Asia’s governments in dealing with the coronavirus. The private sector is uniquely placed to tap the capital markets and contribute.
Granted, this is easiest done by financial institutions, as they naturally provide loans and funds that will be needed regardless. It was no surprise that Bank of China was the first issuer from Asia to sell an international Covid-19 linked bond.
Corporations may have a harder time, unless they directly work in healthcare, or have converted a significant portion of their business to manufacturing protective gear, ventilators or other relevant equipment amid the pandemic.
For those that do sell Covid-19 related social bonds, there are clear benefits.
Investors want to put money to work. This means issuers may be able to get support from new investors by selling Covid-19 deals, which could help them to sell tight bonds regardless of the general market volatility. Kookmin, for instance, paid no new issue premium for its transaction.
For borrowers that are yet to sell green, social or sustainability bonds, a virus relief bond is the perfect segue into socially responsible investing (SRI).
It allows issuers to dip their toes into the market, introducing them to a new investor pool, without the challenge of finding an SRI use of proceeds — something issuers have argued is not always easy.
Additionally, virus bonds, like any SRI transaction, are also great marketing tools and can create positive sentiment around an issuer. Banks providing preferential loans to customers — like many global firms have started doing — will also find that their actions go a long way in improving customer relations.
There is really little downside to selling a Covid-19 bond at this time. Asia’s banks and corporations should see if they can jump on the bandwagon, and learn from the likes of BOC and Kookmin.
Admittedly, not every issuer can use the capital markets to fight a global pandemic, but those that can should.