(Bloomberg) -- Analysts at Barclays Plc are raising questions about the financial and environmental merits of a debt-for-nature swap arranged by JPMorgan Chase & Co. for El Salvador last week.
The deal, which was wrapped up on Oct. 16, allows El Salvador to refinance $1 billion worth of debt and put an estimated $350 million of savings toward conservation. However, it’s not clear El Salvador is an “ideal candidate” for such a transaction given its “relatively low biodiversity scores” and “elevated bond prices,” according to analysts at Barclays led by Jason Keene and Maggie O’Neal.
“We believe additional scrutiny on the quality of the program is warranted in the years ahead,” the Barclays analysts wrote in a client note. When it comes to assessing the merits of the deal, “the jury is still out,” they wrote.
Among concerns raised by the analysts is a lack of transparency around transaction fees. They also note that El Salvador’s government just proposed a 20% cut in the 2025 budget allocation to the country’s Ministry of Environment and Natural Resources, which they say “raises questions with respect to the additionality of the transaction.”
A spokesperson for JPMorgan declined to comment. A representative for El Salvador’s government hasn’t replied to a request seeking comment.
Such swaps are designed to refinance government debt and put savings toward sustainable projects. Aside from JPMorgan, Credit Suisse and Bank of America Corp. have also arranged such deals to date. The products are gaining popularity, however, and more banks now have similar deals in the works, Bloomberg has previously reported.
The El Salvador agreement, which marks JPMorgan’s first foray into the market for debt-for-nature swaps, is equivalent to roughly 14% of El Salvador’s national debt. And at $1 billion, it’s the second-largest such swap ever arranged, outdone only by the roughly $1.6 billion deal arranged by Ecuador, the Barclays analysts said.
JPMorgan’s El Salvador transaction was arranged together with the US International Development Finance Corporation, while Catholic Relief Services — a US-based humanitarian organization — and the Environmental Investment Fund of El Salvador will oversee the conservation component of the deal, according to a statement made available last week.
El Salvador has “effectively brought all parties together to create a structure that combined traditional and innovative capital market technologies aimed at achieving execution certainty and cost savings,” Robert Cozzari, co-head of Latin America markets at JPMorgan, said in an email sent in connection with the deal announcement.
Under the terms of the deal, El Salvador repurchased $1.03 billion worth of its bonds at discounts to par. The buyback was financed through the issuance of new notes, which were all sold to a special purpose vehicle funded via a new $1 billion loan from JPMorgan.
While the interest rates for the new debt haven’t been made public, the deal’s cost is being kept down by the inclusion of political-risk insurance provided by DFC, according to documents published last week. In addition, the Development Bank of Latin America and the Caribbean is providing a $200 million standby letter of credit, which is a type of repayment guarantee, the documents show.
Savings under the arrangement, which is the first of its kind to target riverine ecosystems, are intended to go toward protecting the Rio Lempa river and its surroundings, according to the documents. The ecosystem is a critical national resource, supplying the country with 68% of its water needs.
“We welcome the decision to introduce a range of conservation policies to support the delivery of the program and ensure it is part of a wider ecological agenda,” the Barclays analysts said. “However, the country’s inconsistent track record with regards to conservation means that developing the institutional environment to effectively deliver cost-effective project delivery could be a challenge.”
--With assistance from Maria Elena Vizcaino.
©2024 Bloomberg L.P.