Bankers bet billions on new wave of debt-for-nature deals
Agreements are part of efforts to address a quandary facing world leaders at the UN COP27 summit in Egypt
17 November 2022 - 17:47
byReuters
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Marine iguanas in Tortuga Bay on Santa Cruz Island, Galapagos Islands, Ecuador. Picture: 123RF/RUI BAIAO
Sharm El-Sheikh, Egypt — The Galapagos Islands, with their wealth of rare species that inspired Darwin’s theory of evolution, have incalculable ecological value. But what are they worth?
Perhaps about $800m, judging by the size of a “debt-for-nature” swap deal that could see Ecuador’s debts cut in exchange for protecting its offshore territory’s fragile ecosystem, according to people with knowledge of the talks.
These kind of agreements are part of efforts to address an intractable quandary facing world leaders at the UN COP27 summit under way in Egypt: who will pay the bill for the global fight against biodiversity loss and climate change?
“There’s now a big push to get nature into sovereign debt markets,” said Simon Zadek, executive director at NatureFinance, which advises governments on debt-for-nature swaps and other types of climate-focused finance.
“”The tragedy of debt distress offers a real opportunity,” he added, pointing to nature-rich countries who look like ideal debt swap candidates after big drops in their bond prices this year.
Ecuador isn’t among the world’s richer nations. It’s a serial defaulter and its sovereign bonds are again trading at “distressed” levels, or a deep discount to their face value. But it does have a wealth of biodiversity that it could leverage in a wider region where much of the wildlife has been wiped out.
The country is holding talks with banks and a nonprofit group in an attempt to reach a deal that would see about $800m of its debt refinanced more cheaply, freeing up the savings for conservation efforts, according to the three people with knowledge of the deal, who declined to be named as the discussions are confidential.
At that level, it would be the biggest debt-for-nature swap struck to date. Yet it could eventually be trumped by others, including Sri Lanka, which has been discussing a deal of up to $1bn according to people familiar with those talks.
Cape Verde, an archipelago nation off West Africa, is meanwhile close to a nature swap that could be worth up to $200m, said Jean-Paul Adam, a former Seychelles government official who now works for the UN Economic Commission for Africa (UNECA), providing financing advice to governments.
The Ecuadorean, Sri Lankan and Cape Verde governments did not respond to requests for say for this story, though Ecuadorean President Guillermo Lasso said in a local newspaper on October 12 that its Galapagos swap deal could be wrapped up in four or five weeks.
Possible deals for Ecuador, Sri Lanka and Cape Verde, reported here in detail for the first time, point to a jump in interest for this form of financial alchemy, which was conceived decades ago but remained something of a niche area until recently.
Only three of over 140 or so swaps struck over the past 35 years — the first in 1987 had a value of more than a quarter of a billion dollars, according to global data published by the African Development Bank. The average size was $26.6m.
The combined value of swap deals to date is $3.7bn, according to the data. That’s a fraction of the $400bn of emerging market sovereign debt analysts that Capital Economics recently estimated had fallen to distressed levels.
Advocates say that those current debt problems, combined with the growing political will and the recent successful swap deals in the Seychelles, Belize and Barbados, mean a swathe of other countries are now exploring the model.
Indeed, Adam at UNECA said four African countries were now exploring potential swaps. He declined to name them, saying he wasn’t sure if they were ready to go public.
Patricia Scotland, secretary-general of the Commonwealth of 56 countries, told Reuters: “Lots of my members are looking at it and we're looking at it with them.”
The ecological stakes could barely be higher.
The global populations of mammals, birds, fish, reptiles and amphibians have declined by almost 70% on average since 1970, while Latin America has seen a drop of more than 90%, according to this year’s Living Planet Index compiled by the World Wide Fund For Nature (WWF) and the Zoological Society of London.
Such swaps are often compromises.
Should a country default, its bondholders lose money or at least have to wait a lot longer to recoup it.
Debt-for-nature deals can help as they can produce so-called green, or blue bonds in the case of those that focus on ocean conservation, which appeal to a rapidly growing number of investors who want to meet ESG and net-zero goals.
Veteran debt crisis fund manager Carl Ross at GMO said Belize’s pledge to protect its sprawling barrier reef — the largest in the western hemisphere — helped get its restructuring “over the hump” last year in a deal he was involved with.
At their simplest, these deals see expensive bonds or loans written down and replaced with cheaper financing, usually with the help of a credit guarantee from a multilateral development bank.
Ecuador, for example, is in talks with the Pew Charitable Trusts plus the Inter-American Development Bank and US International Development Finance Corporation, two of the people with knowledge of the planned deal said.
Pew and the banks declined to say.
Securing the buy-in of development banks is usually key for the economics of a deal. But as the banks must closely guard their capital and credit ratings to preserve their ability to borrow cheaply, that hurdle has long restricted the growth of swaps.
The World Bank’s MD of operations, Axel van Trotsenburg, said on the sidelines of COP27 that it supports debt-for-nature swaps, as did African Development Bank President Akinwumi Adesina, who said his bank would “absolutely” start providing credit guarantees.
G7 governments and Barbados Prime Minister Mia Mottley’s “Bridgetown initiative” have all demanded the World Bank and IMF ramp up climate-focused funding.
IMF chief Kristalina Georgieva spoke at COP27, saying swaps were a worthwhile part of the toolkit albeit no “silver bullet” in global efforts to fund conservation.
Indeed, debt-for-nature deals are dwarfed by the scale of the funding challenge: developing countries will need to secure $1-trillion a year in external financing by the end of the decade to take effective climate action to restore nature, a report released at COP27 said.
Nonetheless, those involved in such swaps say they are having an affect.
Belize’s $553m swap last year provided money to protect the world’s second-largest coral reef and reduced its debt level by more than 10% of GDP, the government estimates.
The Seychelles’ 2015 deal, which created the world’s first blue bond after eight years of talks, saw the government commit to protect 30% of its waters — an area the size of Germany — from overfishing and development and bought back $22m of its debt on favourable terms, former environment minister Ronny Jumeau said.
Swap proponents are pushing for the dozen or so major development banks to come together with expanded and standardised support to drive widespread use of the instruments.
“That’s the limiting factor that keeps us from just scaling this to trillions of dollars,” said Kevin Bender at The Nature Conservancy, who leads the NGO's sovereign debt teams and worked on the Belize swap.
Esteban Brenes, the WWF’s us director of conservation finance, said improvements were also needed in how wildlife pledges are monitored and verified so that creditors are satisfied that countries are meeting their commitments.
The WWF has projects in Central and South America where they are monitoring deforestation by tracking jaguars, said Brenes, who has worked on debt-for-nature swaps for the past 25 years.
The big cats need about 50km² of good forest to hunt and reproduce, so are a good indicator of forest health. More data showing swaps work should encourage international institutions to become involved, Brenes added.
“No planet, no business — that is what we need the IMFs of this world to understand,” he said.
Support our award-winning journalism. The Premium package (digital only) is R30 for the first month and thereafter you pay R129 p/m now ad-free for all subscribers.
Bankers bet billions on new wave of debt-for-nature deals
Agreements are part of efforts to address a quandary facing world leaders at the UN COP27 summit in Egypt
Sharm El-Sheikh, Egypt — The Galapagos Islands, with their wealth of rare species that inspired Darwin’s theory of evolution, have incalculable ecological value. But what are they worth?
Perhaps about $800m, judging by the size of a “debt-for-nature” swap deal that could see Ecuador’s debts cut in exchange for protecting its offshore territory’s fragile ecosystem, according to people with knowledge of the talks.
These kind of agreements are part of efforts to address an intractable quandary facing world leaders at the UN COP27 summit under way in Egypt: who will pay the bill for the global fight against biodiversity loss and climate change?
“There’s now a big push to get nature into sovereign debt markets,” said Simon Zadek, executive director at NatureFinance, which advises governments on debt-for-nature swaps and other types of climate-focused finance.
“”The tragedy of debt distress offers a real opportunity,” he added, pointing to nature-rich countries who look like ideal debt swap candidates after big drops in their bond prices this year.
Ecuador isn’t among the world’s richer nations. It’s a serial defaulter and its sovereign bonds are again trading at “distressed” levels, or a deep discount to their face value. But it does have a wealth of biodiversity that it could leverage in a wider region where much of the wildlife has been wiped out.
The country is holding talks with banks and a nonprofit group in an attempt to reach a deal that would see about $800m of its debt refinanced more cheaply, freeing up the savings for conservation efforts, according to the three people with knowledge of the deal, who declined to be named as the discussions are confidential.
At that level, it would be the biggest debt-for-nature swap struck to date. Yet it could eventually be trumped by others, including Sri Lanka, which has been discussing a deal of up to $1bn according to people familiar with those talks.
Cape Verde, an archipelago nation off West Africa, is meanwhile close to a nature swap that could be worth up to $200m, said Jean-Paul Adam, a former Seychelles government official who now works for the UN Economic Commission for Africa (UNECA), providing financing advice to governments.
The Ecuadorean, Sri Lankan and Cape Verde governments did not respond to requests for say for this story, though Ecuadorean President Guillermo Lasso said in a local newspaper on October 12 that its Galapagos swap deal could be wrapped up in four or five weeks.
Possible deals for Ecuador, Sri Lanka and Cape Verde, reported here in detail for the first time, point to a jump in interest for this form of financial alchemy, which was conceived decades ago but remained something of a niche area until recently.
Only three of over 140 or so swaps struck over the past 35 years — the first in 1987 had a value of more than a quarter of a billion dollars, according to global data published by the African Development Bank. The average size was $26.6m.
The combined value of swap deals to date is $3.7bn, according to the data. That’s a fraction of the $400bn of emerging market sovereign debt analysts that Capital Economics recently estimated had fallen to distressed levels.
Advocates say that those current debt problems, combined with the growing political will and the recent successful swap deals in the Seychelles, Belize and Barbados, mean a swathe of other countries are now exploring the model.
Indeed, Adam at UNECA said four African countries were now exploring potential swaps. He declined to name them, saying he wasn’t sure if they were ready to go public.
Patricia Scotland, secretary-general of the Commonwealth of 56 countries, told Reuters: “Lots of my members are looking at it and we're looking at it with them.”
The ecological stakes could barely be higher.
The global populations of mammals, birds, fish, reptiles and amphibians have declined by almost 70% on average since 1970, while Latin America has seen a drop of more than 90%, according to this year’s Living Planet Index compiled by the World Wide Fund For Nature (WWF) and the Zoological Society of London.
Such swaps are often compromises.
Should a country default, its bondholders lose money or at least have to wait a lot longer to recoup it.
Debt-for-nature deals can help as they can produce so-called green, or blue bonds in the case of those that focus on ocean conservation, which appeal to a rapidly growing number of investors who want to meet ESG and net-zero goals.
Veteran debt crisis fund manager Carl Ross at GMO said Belize’s pledge to protect its sprawling barrier reef — the largest in the western hemisphere — helped get its restructuring “over the hump” last year in a deal he was involved with.
At their simplest, these deals see expensive bonds or loans written down and replaced with cheaper financing, usually with the help of a credit guarantee from a multilateral development bank.
Ecuador, for example, is in talks with the Pew Charitable Trusts plus the Inter-American Development Bank and US International Development Finance Corporation, two of the people with knowledge of the planned deal said.
Pew and the banks declined to say.
Securing the buy-in of development banks is usually key for the economics of a deal. But as the banks must closely guard their capital and credit ratings to preserve their ability to borrow cheaply, that hurdle has long restricted the growth of swaps.
The World Bank’s MD of operations, Axel van Trotsenburg, said on the sidelines of COP27 that it supports debt-for-nature swaps, as did African Development Bank President Akinwumi Adesina, who said his bank would “absolutely” start providing credit guarantees.
G7 governments and Barbados Prime Minister Mia Mottley’s “Bridgetown initiative” have all demanded the World Bank and IMF ramp up climate-focused funding.
IMF chief Kristalina Georgieva spoke at COP27, saying swaps were a worthwhile part of the toolkit albeit no “silver bullet” in global efforts to fund conservation.
Indeed, debt-for-nature deals are dwarfed by the scale of the funding challenge: developing countries will need to secure $1-trillion a year in external financing by the end of the decade to take effective climate action to restore nature, a report released at COP27 said.
Nonetheless, those involved in such swaps say they are having an affect.
Belize’s $553m swap last year provided money to protect the world’s second-largest coral reef and reduced its debt level by more than 10% of GDP, the government estimates.
The Seychelles’ 2015 deal, which created the world’s first blue bond after eight years of talks, saw the government commit to protect 30% of its waters — an area the size of Germany — from overfishing and development and bought back $22m of its debt on favourable terms, former environment minister Ronny Jumeau said.
Swap proponents are pushing for the dozen or so major development banks to come together with expanded and standardised support to drive widespread use of the instruments.
“That’s the limiting factor that keeps us from just scaling this to trillions of dollars,” said Kevin Bender at The Nature Conservancy, who leads the NGO's sovereign debt teams and worked on the Belize swap.
Esteban Brenes, the WWF’s us director of conservation finance, said improvements were also needed in how wildlife pledges are monitored and verified so that creditors are satisfied that countries are meeting their commitments.
The WWF has projects in Central and South America where they are monitoring deforestation by tracking jaguars, said Brenes, who has worked on debt-for-nature swaps for the past 25 years.
The big cats need about 50km² of good forest to hunt and reproduce, so are a good indicator of forest health. More data showing swaps work should encourage international institutions to become involved, Brenes added.
“No planet, no business — that is what we need the IMFs of this world to understand,” he said.
Reuters
COP27: Banks must ‘change their view on risk’ to enable climate finance
LETTER: Debt-for-nature swops are win-win for SA and partners
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