Colombia, Peru Eye World Bank Cat Bonds as Trade Revives

The countries are among those looking to take advantage of renewed investor interest in the bank’s catastrophe or cat bonds, or debt offerings where investors risk steep losses in the event of a disaster

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Bloomberg — Colombia and Peru are considering returning to a World Bank program that issues bonds to cover claims on natural disasters after the plan faced a nearly two-year lull.

The countries are among those looking to take advantage of renewed investor interest in the bank’s catastrophe or cat bonds — debt offerings where investors risk steep losses in the event of a disaster — after the World Bank provided $630 million in earthquake protection to Chile in March, its first such deal since July 2021 and the largest single-country deal to date.

Colombia and Peru are two of the countries where the World Bank has previously issued on their behalf. Colombia confirmed it is working on the structure of a potential transaction that would safeguard against the costs of excess rain including flooding, according to a government representative. Peru is holding exploratory talks on a deal with the World Bank to cover earthquakes, a government official said in a text message.

“Chile issued in 2018 and now they’ve come back,” said Michael Bennett, head of market solutions and structured finance at the World Bank. “We expect that it will help generate more interest in our different member countries that are catastrophe-risk vulnerable.”

The World Bank didn’t price any cat bond transactions in 2022 as a broad market slump reduced institutional investors available cash for such offerings. But emerging market nations are once again seeking out these bonds to reduce the cost of buying financial protection against impending catastrophes.

Chile’s earthquake protection came in the form of a $350 million cat bond as well as a $280 million swap contract — where a group of insurance and reinsurance companies will receive payment in exchange for a potential payout should a disaster that falls within certain preset parameters occur.

The mid-March deal generated strong demand, allowing the World Bank to raise more than double initial expectations, with pricing at the tight end of a risk-premium range between 4.75% to 5.5%, according to Bennett.

In World Bank-led cat transactions, the top-rated lender issues the bonds directly, allowing emerging sovereign issuers — typically with lower credit ratings — to reduce their financial costs. With the United Nations predicting climate change will drive an increase in natural disasters to a rate of 560 a year by 2030, up from around 400 in 2015, the desire for such protection plans is likely to increase.

Colombia and Peru took part along with Chile and Mexico in a $1.36 billion World Bank deal for earthquake protection in 2018.

With the support of the World Bank, Peru is considering updating the model used in the bond priced in 2018, the government official wrote in the email.

The World Bank is also working with Caribbean countries to pull together a catastrophe bond for the region, according to Bennett.

Jamaica plans to take part in the transaction, said Dian Black, principal director of debt management at the country’s Ministry of Finance.

“The plan is just to participate in the regional cat bond that the World Bank is organizing,” said Black in a separate interview. “Some of the Caribbean countries are already on board.”

--With assistance from Manolo Serapio Jr. and Kathleen Seaman

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