(Bloomberg) -- Standard Chartered Plc has wrapped up a $300 million deal that will allow the Bahamas to refinance debt and allocate savings to ocean conservation.
The transaction, which marks StanChart’s first in the market for such swaps, was arranged together with the Nature Conservancy and backed by a partial guarantee from the Inter-American Development Bank.
Builders Vision, an impact platform founded by Walmart Inc. heir Lukas Walton, also provided a guarantee and Axa XL is offering credit insurance, representing the first time private capital has been used as a direct backstop in such transactions.
It’s an “ambitious step,” Rochelle Newbold, director of the Bahamas climate change and environmental advisory unit, said in a statement.
The terms of the deal allowed the Bahamas to repurchase $218 million of its eurobonds for $216 million and pay down $81 million of a bank loan, in total equivalent to roughly 6% of the country’s external debt. That was financed using a new $300 million, 15-year loan from StanChart at an interest rate of 4.7%.
The Bahamas has taken “very expensive short-term debt and replaced it with very cheap, long-term debt,” Dennis Eisele, StanChart’s head of global credit market financing for Latin America, said in an interview. That’s “the holy grail in liability management.”
The deal adds to a growing market for so-called debt-for-nature swaps, which are designed to exchange existing sovereign liabilities for new, cheaper private debt by drawing on de-risking instruments to cut borrowing costs. The deals are proving popular among junk-rated sovereign issuers. The Bahamas carries a B+ rating at S&P Global Ratings, four levels below investment grade.
Alongside a $200 million partial guarantee from the IDB, Builders Vision will offer a $70 million collateralized guarantee and Axa XL will provide $30 million of insurance. Earlier deals relied on multilateral development banks and the US International Development Finance Corp. for credit enhancement.
The transaction has successfully drawn on “new pools of capital,” said Marisa Drew, chief sustainability officer at StanChart. Philanthropists are now “coming together in a very deliberate way,” which represents an opportunity to “unlock” capital.
And having Builders Vision play a “catalytic role” as a family office represents a “standout” element of the deal, she said.
If the guarantees are triggered, the IDB would be the first to be called on to pay, said Slav Gatchev, managing director, sustainable debt at TNC. Meanwhile, Builders and Axa can claim the environmental, social and governance credentials of the deal.
The IDB’s involvement enables rates that are “much more competitive with what the market would imply on an uncovered basis,” Gatchev said. Investors benefit from a “halo effect” because “the bet is that the government will make good on the underlying obligations.”
The arrangement is expected to generate $124 million of cash savings, which will be used for marine conservation over the next 15 years. Money also will go into an endowment fund to sustain the conservation work beyond the life of the loan. StanChart expects the endowment will grow to $20 million by 2039.
The deal’s savings will be used to protect mangroves, coral reefs and sea grass meadows, which help buffer the Bahamas from increasingly frequent and severe hurricanes while sucking up carbon dioxide from the atmosphere, said Marcia Musgrove, northern Caribbean program director at TNC.
“So much of our economy and our way of life is really hinged on ensuring that we have a well-managed ocean and coastal areas,” Musgrove said.
The money will be managed by the Bahamas Protected Areas Fund, a conservation trust fund set up in 2014. The Bahamas National Trust, a local nonprofit, will work with the government to run the ocean activities. Rothschild & Co. advised the Bahamas on the deal.
Until last month, Credit Suisse and Bank of America Corp. were the only two global banks to have completed debt-for-nature swaps. JPMorgan Chase & Co. recently joined the market with a $1 billion deal for El Salvador. At least three other global banks currently have deals in the pipeline.
While earlier iterations of debt-for-nature swaps were financed by the issuance of bonds bought by institutional investors, both JPMorgan and StanChart structured their deals as loans. What’s more, the Bahamas loan allows it to pause repayment for up to a year, in the event of a natural disaster.
“There’s no better way to demonstrate our commitment and interest in the asset class than with our own capital,” StanChart’s Eisele said. “We are very comfortable owning the risk.”
--With assistance from Esteban Duarte.
(Updates with adviser details in sixteenth paragraph.)
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