The Asian Development Bank (ADB) is aiming to issue its first catastrophe bond in the coming months, with the parametric deal expected to be around $120 million – $150 million in size, designed to protect both the Kyrgyz Republic and Tajikistan against earthquake and flood risks over a three-year term.
Notably, this will be the first catastrophe bond that the Asian Development Bank (ADB) has issued, with the notes expected to come via one of its own securities issuance programs.
This dual-pronged strategy enhances financial preparedness by combining two distinct instruments: Contingent Disaster Financing (CDF), which will provide immediate budgetary support for medium-severity hazards and health emergencies, and a parametric catastrophe bond designed for low-frequency, high-severity events, which the ADB is calling a Disaster Relief Bond (DRB).
Now, further details about this proposed cat bond issuance that the ADB plans to make have been revealed.
According to documents seen by Artemis, “ADB will issue a 3-year DRB amounting to $120 million–$150 million in internationally accepted insurance-linked securities markets in the first half of 2026 based on the terms of the bilateral insurance agreements to be entered into between ADB and each country. ADB will manage the entire process, including structuring the bond, issuing it to investors, and handling coupon payments, principal payments and payouts without a special purpose vehicle or collateral arrangements.”
The documents also revealed that the ADB will issue the cat bond directly under its Global Medium-Term Note (GMTN) program. By leveraging its AAA credit rating, the ADB also aims to simplify the transaction and reduce costs. This structure ensures investors are exposed only to the specific catastrophe risks and the ADB’s own credit risk, rather than the sovereign risk of the two Central Asian nations.
“If a qualifying disaster meets the agreed parametric trigger, as validated by a third-party loss calculation agent, investors will forfeit all or part of the DRB principal, depending on the payout rules. The corresponding bond proceeds will be transferred by ADB directly to the government of the affected country to support immediate disaster response, as outlined in the project administration manual (PAM),” the documents read.
As mentioned, the pilot cat bond will be designed to provide rapid liquidity in response to low-frequency, high-severity disasters caused by major earthquakes and flood events in both countries.
Moreover, the cat bond will also be supported by a $15 million grant per country from the Asian Development Fund (ADF) 14 Crisis Response Window. This grant acts as a multiplier, supporting the risk premium to secure significantly higher coverage, leveraging up to $60 million–$75 million (4–5 times) of cover per country through DRB issuance.
“The DRB issuance will lead to an estimated $50 million coverage per country for earthquakes, and between $10 million–$25 million coverage per country for floods. The DRB will utilize parametric triggers, whereby payouts are activated based on predefined disaster thresholds rather than post-event damage assessments. This ensures speed and transparency in payout and is the most common structure used in sovereign catastrophe bonds,” the documents read.
Further details in the documentation also reveals that the cat bond will utilise the CAREC Climate and Disaster Risk Modelling framework, developed by ADB, which uses up-to-date data to estimate the potential financial impacts of earthquake and flood events in both Kyrgyz Republic and Tajikistan at different return periods.
According to the documents, the modeling estimates the following for 1-in-25-year events:
For Kyrgyz Republic, an earthquake of this magnitude could cause $485 million in damage; the DRB would cover 25% of its designated tier, providing a $12.5 million payout. While for Tajikistan, a similar earthquake could result in $417 million in damage, also triggering a $12.5 million payout.
For floods, the expected damages are lower but still significant. For Kyrgyz Republic, a 1-in-25-year flood could cause nearly $485 million in damage, which would trigger a $3.75 million payout. For Tajikistan, a 1-in-25-year flood could cause about $425 million in damage, with the DRB also paying out $3.75 million.
While the pilot is a significant step forward, the ADB acknowledged that the Risk-Layered Disaster Relief Finance Program faces a number of hurdles related to policy implementation, institutional capacity, and market acceptance of the DRB instrument.
“ADB will ensure that the DRB follows international standards and is structured to attract institutional investors. This will be implemented through technical assistance to structure the DRB instrument and prepare the required documentation for bond issuance, including insurance agreements between ADB and the countries. Other risks include delays in policy reforms, which will be managed through continuous engagement with policymakers and development partners,” the firm explained.
This will mark a significant achievement for the Asian Development Bank (ADB) when this proposed catastrophe bond comes to market, being the first it will have facilitated for member countries.
