Four recent debt-for-nature swaps by the Bahamas, Barbados, Ecuador and El Salvador together raised more than $1bn of funding for conservation or climate resilience projects. In just two months, they more than doubled the aggregate amount of finance produced by such transactions since they began.
Moreover, these deals brought novelties — in the parties involved, uses of proceeds and structures — that suggest such transactions could be useful to a far broader group of countries than previously thought.
Now, investment banks are busily trying to get in on the action. At least 12 of the 18 Latin American debt capital markets houses surveyed by GlobalCapital in December said they were chasing debt-for-nature swap mandates, even though there have only been seven such deals ever from Latin America and the Caribbean — including the recent quartet.
It wasn’t always thus, and it is worth remembering how this began.
The Seychelles completed the first debt-for-nature swap of the modern era in 2018, when it launched the world’s first sovereign blue bond, raising $15m to support marine protected areas and sustainable fisheries. It was an exceedingly complex transaction, several years in the making.
A case study of the transaction by The Commonwealth Blue Charter includes a diagram of the structure. It’s a maze of arrows and numbers between trusts, creditors, guarantees, endowment funds and debtors.
All this for the swap part of the transaction to achieve conservation and adaptation funding that The Nature Conservancy, the brains behind it, estimated at “up to $430,000 per year”. Sure, it was highly innovative, but was it worth all that work?
Scepticism was therefore widespread when Belize introduced the concept to the international bond market as part of a debt restructuring in 2021.
Observers questioned the relatively low amount of climate funding raised, relative to the advertised total transaction size of $364m; the fees taken by various deal parties, the labelling of blue bonds; and supposed inefficiencies caused by the complexity of the structure.
Even those who could see through those criticisms argued that this was going to remain a niche product, the preserve of sovereigns in extreme debt distress, which could buy back their debt at hefty discounts, like the 55 cents on the dollar Belize achieved.
Right from the start, however, beneath the complex structures there was a fairly straightforward concept at the core of The Nature Conservancy’s programme: drum up support from mission-driven organisations such as development finance institutions, and apply it to support a structure that generates fiscal savings for an emerging market country, rather than extra debt.
From the Seychelles’ original $20m debt swap to Ecuador’s recent $1.5bn bond buyback, that principle has remained the same.
By planting the initial seed in the Seychelles, TNC has ultimately managed to achieve something admirable. Paired with capital markets’ hunger for dealmaking and the creativity this brings, debt-for-nature swaps are now happening at an unprecedented scale, with an ever-increasing number of parties — investment banks, credit enhancement providers and investors.
Moreover, structures are being tailored to specific projects. Barbados, for example, borrowed against its savings to generate upfront funding, not for conservation, but for a sewage treatment plant.
More efficient structures have also enabled governments not in severe debt distress to pull off sovereign debt conversions, as these deals are now being called in official circles.
In a world of short term fixes and quick bucks, it’s a reminder that from little acorns, mighty oak trees grow. Just because an innovation is small, complicated, hard work or difficult to understand, that does not mean it should be ignored.