The IADB is planning to include a so-called “hurricane clause”, which would allow borrowers to defer principal payments on eligible loans for two years after an eligible event, through its Flexible Financing Facility. The option would be available on both new and existing loans.
The IADB confirmed it was working on the option, saying that details were “still being worked out”. It is aimed at small Caribbean and central American nations, several of which have suffered extreme economic destruction as a result of hurricanes in recent years — and many of which have very high debt levels.
“Finally, our small states which often seem invisible are being heard,” said Timothy Antoine, governor of the Eastern Caribbean Central Bank, the monetary authority for the members of the Organisation of Eastern Caribbean States.
“I welcome this move by the IADB. It is the right and appropriate thing to do. I applaud the IADB on its leadership as the first multilateral to proceed with this clause.”
Moreover, Antoine said that disaster-linked clauses “should be standard in all sovereign debt contracts” in the Caribbean, as policymakers seek to deliver an effective response to the climate crisis and build resilience.
Not a debt reduction
Hurricane clauses first appeared when Grenada restructured its bonds in 2015, with Barbados following in October 2019 with its own bond restructuring. Barbados prime minister Mia Mottley had told GlobalMarkets at the time that small island states, especially, needed to make their debt more resilient to climate events, and pledged to take her workings to the IADB and Caribbean Development Bank.
Mottley’s prompting seems to have had the desired effect with the IADB.
“We are convinced that the use of such counter-cyclical features will come to be seen as one of the main ways of making debt structures more resilient,” said Sebastian Espinosa, managing director at White Oak Advisory, which advised Barbados and Grenada on their restructurings.
No borrowers have used hurricane clauses in primary bond markets, but the Espinosa believes the IADB’s move could be the first step.
“A mindset change is still required for that, and it is precisely in this sort of situation that the official sector can play a catalytic role,” he said.
So far, no other banks have offered the hurricane clause, with some concerns over the possible impact on the credit rating of the lender.
However, the option proposed by the IADB would not constitute a debt restructuring and is not related to a country’s level of debt.
“We would like to emphasise that this offering will imply no change to our financial policy framework and that any option would be offered against a fee and as long as the bank is able to accommodate it while retaining its strong financial footing,” said the IADB in a statement.
Insurance and reinsurance markets are generally too expensive for small Caribbean island nations, while calls for a regional catastrophe bond — such as that used by the Pacific Alliance countries to provide insurance against earthquake risk — have not gained traction.