Bonds that heal - BNP Paribas CIB
 
Thursday 26 March 2020

As the world grapples with the threat of the Covid-19 coronavirus, more capital – in the form of social bonds – must be urgently deployed to support healthcare systems and even struggling companies.


This article is also available in Simplified Chinese.

The post-Lunar New Year period in Asia, which usually signals the ramping up of economic activity across the region, has instead been marred by uncertainty as Covid-19 spreads across borders. Global growth estimates have been slashed and lives disrupted by travel bans, quarantines and a growing death toll. The resulting slowdown in economic activity has also left companies exposed, which could have a profound impact on social development and unemployment across the globe.

While the infection rate continues to rise, the World Health Organisation has declared a global pandemic. The World Bank approved USD 12 billion in emergency funding to support poorer nations in the fight, as questions circle over whether healthcare infrastructure will withstand the virus.

"As Covid-19 continues to threaten lives and puts mounting pressure on the global economy, we need to carefully examine whether our healthcare systems are sufficiently robust to withstand this pandemic – in addition to future infectious diseases," says Chaoni Huang, Executive Director, Head of Sustainable Capital Markets, Asia Pacific, Global Markets at BNP Paribas." This is a problem that is likely to become increasingly ubiquitous with the onset of global heating."

Given the dramatic acceleration seen in various sustainable financing forms across the globe, experts are now asking if social bonds could be one of the solutions that helps to fund gaps across core social services, such as healthcare, enabling us to improve our readiness and resilience to crises.


Social bonds and healthcare services

Once viewed as a niche and obscure asset class by investors, sustainable bonds have enjoyed a stratospheric rise over the last five years. This trend has been visible in Asia Pacific (APAC) too. In 2016, there was only one social bond issuance in the region totalling USD 500 million. Three years later, there were 18 issuances with a cumulative deal value of USD 8.6 billion. The use of proceeds from social bonds, namely utilising the capital raised to finance projects with positive societal benefits, is having a transformational impact across APAC, not least in the region's healthcare systems.
" The use of proceeds from social bonds, namely utilising the capital raised to finance projects with positive societal benefits, is having a transformational impact across APAC, not least in the region's healthcare systems. "

Healthcare standards across APAC are quite varied. Developed markets such as Singapore, South Korea, and Australia generally have strong healthcare infrastructure. Meanwhile, Thailand has introduced an affordable healthcare service that has so far yielded impressive results.

In China, the pressures of housing and treating the world's largest population are evident. But the country's response in Wuhan, a city of around 11 million people, was swift with new hospitals erected out of shipping containers in a matter of days to house the increasing numbers of patients infected.

A number of markets are now rapidly upping investment into their healthcare infrastructure. Despite its economic downturn, Hong Kong's recently announced 2020/21 budget puts a heavy emphasis on healthcare spending as the jurisdiction looks to mitigate the spread of Covid-19 and longer term healthcare planning. Policymakers have earmarked around HKD 500 billion (USD 64.3 billion) for its two 10-year Hospital Development Plans, which will provide an additional 15,000 hospital beds and more than 90 new operating theatres to meet expected service demand by 2036. Singapore announced in February that it will triple its healthcare expenditure to about SGD 12 billion (USD 8.66 billion) a year.

Companies also looking for the right medicine

The coronavirus outbreak has not only laid bare the structural vulnerabilities facing the Chinese healthcare system, but it is also causing enormous damage to the economy, owing to the massive decline in productivity. Reuters anticipates China's economic growth will fall to 4.5 percent in Q1 2020, down from six percent the previous quarter.

In response, "Chinese companies are leveraging capital markets by issuing 'virus control' bonds, to combat the virus' negative effects, which touch the very essence of social bonds by dedicating proceeds to social causes," Huang adds. This is being encouraged by China's regulators, who have not only streamlined the bond sale approval process but are actively calling on state-owned banks to purchase the bonds.



" Social bonds could be one of the solutions that helps to fund gaps across core social services, such as healthcare, enabling us to improve our readiness and resilience to crises. "
Reports suggest 25 issuers in China are already selling 'virus control' bonds and a further 20 have plans to do so. Many companies have also issued this debt in order to take advantage of cheaper borrowing costs. Experts believe the bonds could raise up to USD 1.3 billion, with 44 percent of the proceeds being set aside for disease control, manufacturing of medical equipment, hospital construction and donations, and the rest going towards refinancing.

For example, China EXIM and China Development Bank have respectively issued RMB 7 billion and RMB 13.5 billion "virus control" bonds, the proceeds of which will be used to help contain the virus. Both issuances were more than 10 times oversubscribed, a clear indication that investors believe the instruments will deliver a genuinely positive social impact. Similarly, State Development Investment Corporation (SDIC) issued a labelled sustainability bond, raising RMB 500 million to fund the production of virus prevention materials. These initiatives will help alleviate some of the pressing challenges currently facing China's healthcare services.

The future of social bonds

Covid-19 has stirred widespread debate about the ability of governments and healthcare systems to handle pandemic emergencies. Moreover, it has also prompted the authorities to take swift action to improve their health services. Right now, most sustainable bonds are focused exclusively on suppressing the risks posed by climate change. Of the USD 274 billion worth of sustainable bond issuance in 2019, just five percent were dedicated to funding social projects. It is critical that social challenges are not neglected.



As the sustainable bond market continues to accelerate, more capital needs to be deployed to support healthcare services, SMEs and education to facilitate socio-economic advancement. The current Covid-19 crisis clearly amplifies the urgent need for greater investment in healthcare infrastructures.


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