(Bloomberg) -- Bank of America Corp. has completed a $1 billion deal to refinance part of Ecuador’s debt and help fund the protection of forests, rivers, lakes and wetlands in the Amazon.
The so-called debt-for-nature swap, which marks the second such deal for both BofA and Ecuador, was arranged together with the Nature Conservancy, and is backed by a partial guarantee from the Inter-American Development Bank, and political-risk insurance from the US International Development Finance Corp.
The deal “alleviates the burden of public debt” and “ensures sustainable resources” for the protection of Amazon ecosystems, Juan Carlos Vega, Ecuador’s finance minister, said in a statement.
Debt-for-nature swaps are designed to help countries refinance their obligations at better terms and allocate savings to environmental or social goals.
Insurance from DFC and a $155 million liquidity guarantee from IDB helped lower the cost of borrowing for Ecuador, whose new bonds are rated AA by Fitch Ratings and Aa2 by Moody’s Ratings. Ecuador, meanwhile, is junk-rated at Moody’s, S&P Global Ratings and Fitch Ratings.
“Ecuador is a key US ally and one of DFC’s largest markets worldwide,” said DFC Chief Executive Officer Scott Nathan.
Unlike banks that have structured recent deals with loans, BofA arranged a bond issuance to finance the transaction. The bonds attracted a broad range of investors, including hedge funds and insurance companies, as well as asset managers, Karen Fang, global head of sustainable finance at BofA, said in an interview.
The Details:
Ecuador’s swap allowed it to effectively buy back about $1.5 billion of dollar-denominated bonds in the range of 47.5 to 73 cents on the dollar.
The bond tender was financed through a new 17-year $1 billion loan at 6.94% interest from Amazon Conservation DAC, a special purpose vehicle incorporated in Ireland. That loan was in turn funded through the issuance of $1 billion in new bonds due 2042, with a 6.034 coupon.
The government of Ecuador expects the arrangement to generate roughly $800 million of net fiscal savings by 2035. Over the next 17 years, $323 million will be allocated toward conservation, including TNC’s technical support. And about $4.5 million each year will go into an endowment fund to sustain those efforts beyond the life of the financing structure. Ecuador expects the endowment to grow to $137 million by 2041.
“We’re striving to make these deals as liquid and boring and transparent as possible so that we can incentivize more institutional investors to come in and commit,” Slav Gatchev, managing director of sustainable debt at TNC, said in an interview.
Most of the new conservation funding will be distributed as grants by a new trust fund called Fondo del Biocorredor Amazonico, which will be run by a local board of directors, including representatives from government, TNC, indigenous groups and business.
Ecuador, along with almost 200 other nations, has committed to protect 30% of its land and waters by the end of the decade through the Kunming-Montreal Global Biodiversity Framework, which was adopted in 2022. Currently, 24% of Ecuador’s land and inland waters are protected, and 19% of its seas. The proceeds from the swap will help cover additional areas and improve management of those that already exist, said Melissa Garvey, global director of nature bonds at TNC.
Goldman Sachs Group Inc. was among parties laying the groundwork for the Ecuador swap, Bloomberg reported in September. But the bank has since withdrawn from the deal. A spokesperson for Goldman declined to comment.
Ecuador wrapped up its first debt swap last year. Together, the two deals have allowed the country to cancel close to $1.5 billion of outstanding debt and raise about $900 million for conservation, according to Ramzi Issa, a former UBS banker who advised Ecuador’s finance ministry in his new role at Enosis Capital, a boutique credit fund.
These are funds “that were destined for external debt service, but are now being retained and also invested inside the country,” Issa said. “That’s a win-win.”
However, past debt swaps have sometimes drawn criticism.
Ecuador’s first deal, for example, became the subject of a complaint by a group of local nonprofits who claim the deal lacked transparency and didn’t sufficiently consult local communities. They also pointed to the slow disbursement of conservation funds. Those complaints were looked into by a unit of the IDB, which mediated and is now monitoring an agreement between parties.
“We understand that there’s an interest in urgency to make sure that the trust fund can be effective at the earliest time point possible,” said Garvey at TNC, which wasn’t involved in Ecuador’s first deal. “We have been working to ensure that it is up and running ready to go.”
(Adds DFC comment in sixth paragraph.)
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