(Bloomberg) -- JPMorgan Chase & Co. has wrapped up a $1 billion refinancing deal for El Salvador, equivalent to roughly 14% of the country’s debt, in an arrangement that will help it channel funds toward the conservation of its longest river.
The transaction, which marks JPMorgan’s first foray into the market for debt-for-nature swaps, was arranged together with the US International Development Finance Corporation, according to a statement. Catholic Relief Services, a US-based humanitarian organization, and the Environmental Investment Fund of El Salvador will oversee the conservation component of the deal.
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 by email.
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 on the new debt haven’t been publicly disclosed, the deal’s cost is being kept down by the inclusion of political-risk insurance provided by DFC. 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.
Such credit enhancements typically lower the borrowing costs to a level that countries like El Salvador, which carries junk ratings at Moody’s Ratings, S&P Global Ratings and Fitch Ratings, can afford.
The arrangement, which is the first of its kind to target riverine ecosystems, is estimated to generate more than $352 million of savings for El Salvador to be put 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.
The deal “not only reaffirms this government’s commitment to economic growth, it also enables us to achieve this growth while preserving one of our most precious natural resources,” El Salvador President Nayib Bukele said in the statement. “With this debt conversion, we aim to transform the environmental and economic future of El Salvador.”
Moody’s has warned that increasingly frequent and severe weather shocks have left El Salvador highly exposed to environmental-related credit risks. Flooding and landslides, as well as water scarcity, threaten the country’s agriculture sector, which employs 16% of its workforce, Moody’s has said.
The savings from the deal will channel $350 million into the Rio Lempa Conservation and Restoration Program over the next 20 years. Of that, $200 million will fund the program directly, while $150 million will go toward an endowment intended to extend the project’s funding beyond 2044. The program also will provide grants to nonprofits in El Salvador to help support the goals. It’s not clear how the remaining $2 million will be allocated.
In addition to the Rio Lempa program, El Salvador has committed to a series of new water-protection measures.
Until as recently as last year, the only two global banks to have completed debt-for-nature swaps were Credit Suisse and Bank of America Corp. At least four other global banks currently have deals in the pipeline, Bloomberg has previously reported. These include UBS Group AG, which bought Credit Suisse early last year. The Swiss bank is close to completing a deal for Barbados, Bloomberg has reported.
Listen on Zero: High Hopes for Biodiversity, But Who Will Pay?
Other deals in the works include a swap being arranged by Goldman Sachs Group Inc. and BofA for Ecuador.
Earlier debt-for-nature swaps have targeted marine conservation. As well as protecting and restoring a river watershed, El Salvador’s new deal will also target water security and local economic development.
JPMorgan Chase Bank acted as sole arranger and lender for the loan, and JPMorgan Securities was dealer manager in the tender offer for El Salvador’s bonds. ArtCap Strategies acted as financial adviser and global coordinator for the El Salvador transaction, and White & Case LLP acted as legal adviser to the country.
--With assistance from Esteban Duarte.
(Adds details related to the transaction in the fourth paragraph.)
©2024 Bloomberg L.P.