(Bloomberg) -- The deep discount at which many African countries’ debt trades makes the continent a prime location for debt-for-nature swaps, according to a banker who helped conclude the first execution of the instruments.
The yields on African bonds are about 120 basis points higher than those of emerging-market peers, according to JPMorgan Chase & Co. data. This premium makes it attractive for the swaps, where sovereign debt is typically bought on the secondary market at a steep discount and part of the savings are redirected toward conservation.
“Any country that’s under stress is now seeing this as a potential solution,” Marisa Drew, Standard Chartered Plc’s chief sustainability officer, said in an interview. “It has applicability across a lot of African countries and we see a lot of keen interest.”
In a former role at Credit Suisse Group AG, Drew helped pioneer the first sizable debt-for-nature swap, a $553 million deal for Belize in 2021.
Only one large debt-for-nature swap has been concluded in Africa so far — a $500 million deal between The Nature Conservancy and Gabon for marine conservation that was brokered by the Bank of America and involved the repurchase of dollar-denominated sovereign bonds. Others have followed in the Caribbean and Latin America — with deals concluded by Barbados and Ecuador — as the fallout of the Covid 19 pandemic strained national finances in the region.
African countries that have expressed interest in doing debt-for-nature swaps include Zambia, Kenya and Angola.
While Credit Suisse and Bank of America were the first to complete the swaps, other banks have now arranged deals or are exploring them as part of a push to find ways for the financial markets to play a role in protecting biodiversity.
The value of the deals concluded globally so far is small, with about $1.6 billion in new debt issued, according to data compiled by Bloomberg, with the unique situation of each country a constraint.
The World Bank and other market participants are exploring “some sort of ability to make them more easily replicable,” Drew said. “The more we can start to have a systematic approach, the more that you can then scale these.”
While derivations of the instruments, such as debt-for-food security swaps, could also be utilized, they won’t be applicable to those nations that don’t have debt that trades at a deep discount, she said.
“There’s no reason why the country couldn’t issue a blue bond, for instance, with a dedicated use of proceeds, which is another area that we’re exploring with a number of countries,” Drew said. “There is a pool of investors and sustainable investors who are very keen to support, say oceans.”
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--With assistance from Colleen Goko.
©2024 Bloomberg L.P.