Belize Blue Bonds: Small Nation, Major Change
Smaller nations are reducing their debt by pledging to protect their natural resources, indicating how governments, NGOs, and large financial institutions alike can work together to help empower small nations to take on a bigger role in the fight against climate change. On November 5, 2022, Belize signed a debt-for-nature swap with conservation organization The Nature Conservancy (TNC) that reduced the country’s external debt by a shocking 12% of GDP. In recent years, Belize has been wracked by climate crisis after climate crisis. Sea level rise, bleached corals, and coastal erosion have damaged the once pristine beaches that bring nearly a million tourists per year to the small Central American nation. In 2020, hurricanes Eta and Iota caused runaway flooding, damaging Belize’s infrastructure. To make matters worse, Belize is more than 2 billion dollars in debt, leaving the small nation fiscally unable to take any proactive climate action. However, nonprofits like The Nature Conservancy are partnering with big banks to give nations like Belize a chance to take up arms in the fight against climate change. By restructuring debt in return for a commitment to conservation, Belize can gain more financial agency and protect its valuable natural resources simultaneously.
The deal, signed in November of last year, is the largest debt refinancing for ocean conservation to date, and while debt-for-nature swaps have existed in one form or another since the 1980s, this one has some key differences that may pave the way for future deals. Past deals functioned as grants, typically involving creditor governments writing off debt bilaterally so long as the savings were channeled into conservation. The Belize deal marks a departure from this trend, as in this case the bond market itself provided the “grant” in the form of a discount price. Secondly, the deal involved debt owed to private creditors and was ultimately financed by a separate class of private investors, paving the way for future deals with countries that are exposed to climate change yet have expensive debt on their books.
About the deal:
The financial transaction was arranged by NatureVest, TNC’s impact investment unit, in support of TNC’s Blue Bonds for Ocean Conservation strategy. Credit Suisse arranged and financed the “Blue Bond,” a debt conversion enabling Belize to repurchase USD 553 million, a quarter of the country’s total public debt, from bondholders at a 45% discount. Not only did this debt conversion result in a 189 million USD reduction in principal outstanding, but it is projected to create $180 million USD in conservation funding over the next 20 years. Belize previously had $553 million in a single Eurobond known as the “Superbond”, comprising all of Belize’s external commercial debt, which was trading at a high discount. At Belize’s request, TNC arranged an innovative financial structure, the DFC-insured Blue Loan between the Belize Blue Investment Company (BBIC) and Belize, that allowed the country to repurchase the Superbond. DFC credit enhancement allowed BBIC to raise funding from Credit Suisse through the insurance of highly rated blue bonds. Because of the favorable rating, Credit Suisse was able to place the bonds with institutional investors seeking low risk assets, namely global insurance companies, pension funds, highnet-worth individuals, asset managers, all the while passing the savings onto Belize at below-market rates. In return, Belize has pledged to increase biodiversity protection zones from 15.9% to 30% of marine habitat by 2026.
Key Conservation Impact:
The transaction has been recognized among the international community as a milestone in conservation finance. Notably, the financial maneuver will allow Belize to protect 30% of its marine habitat by 2026, conservation areas which are key to the stability of Belize’s marine ecosystem (and as a result, are also crucial to tourism in the region). The deal also entails a revision and implementation of Belize’s Integrated Coastal Zone Management Plan to include marine and coastal biodiverse areas. Finally, the transaction initiates the founding of a Conservation Fund, which will fund conservation efforts for the foreseeable future.
Ultimately, this debt conversion structure, which utilizes “Blue Bonds” to unlock sustainable conservation funding, is both replicable and scalable. As long as countries are committed to conservation, and large financial institutions are willing to provide risk mitigation products (i.e. credit guarantees), this same sort of debt-for-nature swap has potential to generate funding for conservation across the globe. In fact, experts have concluded that this refinancing method can even be used in countries that are not threatened by extreme debt, who could still generate huge amounts of conservation funding by refinance their bonds with lower coupons and longer tenors. Hopefully, Belize’s debt swap paves the way for similar deals to come, and large banks, NGOs, and small nations continue working together in the fight against climate change.