A lead negotiator on Ecuador's recent US$1.63bn debt-for-nature swap, which raised US$450m for marine conservation, is working on a debt-for-social swap to raise funds for education and child nutrition.
The proposed swap would see Ecuador exchange approximately US$3bn of debt trading below par for new debt to secure around US$900m of savings that would be used to fund the projects.
Its chief architect is environmentalist and social activist Roque Sevilla, a former director of the Worldwide Fund for Nature and former mayor of Quito, who worked on the financial design of Ecuador's Galapagos debt exchange and negotiated with the country's fishing industry.
The two social deals could be executed separately, or combined in a single transaction, Sevilla told IFR. He is also expecting more debt-for-nature swaps from Ecuador, including a possible deal to protect the country's coastline.
"I am working on new debt-for-social swaps. One is for education and the other is for a food programme for children. Both would have the same structures and guarantees" as the Galapagos deal, Sevilla said.
The extension of debt-for-nature swaps to other ESG purposes has been widely anticipated and demand is high in developing countries with an urgent need to finance social development.
Agostina Pechi, head of EM and commodities local sales and Latin America structured credit sales at Goldman Sachs, is expecting five to 10 debt swaps from Latin America in the next two to three years, assuming conditions are right and deals get buy-in from NGOs and US-based agencies. "I do expect to see these transactions," she said.
Ecuador already has a track record in the social format, having issued the world's first sovereign social bond, via a US$400m transaction in 2020 that was made possible by a US$300m guarantee from the Inter-American Development Bank.
"A debt-for-social swap for Ecuador is feasible,” said Sebastian Espinosa, managing director at White Oak Advisory who advised on a recent debt exchange and blue bond for Barbados.
Bank backing
Ecuador's education project is being led by Unidos por la Educacion, a public-private partnership comprising 72 private sector companies, the education ministry and a slew of non-profits, universities and local governments.
Although the deal is at an early stage, it has already attracted international bank backing. Sevilla is now working on securing guarantees from multilateral development banks or international organisations – and government support. "I already have the bank. Now I need the government and the guarantees to make all the deals," Sevilla said.
The deal would use a similar special purpose vehicle to the Galapagos transaction to administer funds earmarked for the education and child nutrition programmes.
In the Galapagos transaction, the government used the proceeds of a US$656m bond to buy back US$1.63bn of debt trading below par, which lowered its debt stock by approximately US$1bn, and secured US$450m over a period of 18.5 years for marine conservation.
Sevilla calculates that the food and education projects would each require US$10m–$20m a year over the next 30 years. To secure funds on a similar basis to the Galapagos deal, he estimates that Ecuador would need to swap about US$3bn of debt based on current prices.
Ecuador has US$15.9bn of sovereign bonds outstanding, according to Refinitiv data. Its 5.50% bonds due 2030 were trading at 49.125 cents on the dollar on June 15, while its 2.50% bonds due 2035 were trading at 34.625 cents.
Ecuador's government is also said to be pursuing debt swaps to fund conservation projects that could include a deal to prevent Amazon oil extraction and another blue bond. In March, the government declared the first eight nautical miles of its continental coast to be a nature reserve, creating a protected area of 1.5m hectares. "I believe there's going to be more debt-for-nature swaps in the case of Ecuador," Sevilla said.
Guarantees required
The long lead times of such deals (the Galapagos transaction took 2.5 years) makes the timing of any new debt swaps hard to predict, particularly given Ecuador's turbulent political backdrop, but the size of the envisaged social swap could be attractive to investors.
"The Galapagos transaction got the market interested because of its large deal size, as this potentially makes the investment more liquid," said Steve Liberatore, head of ESG and impact for global fixed income at Nuveen, an investor in the transaction.
National and supranational agencies are key to any future ESG-linked debt swaps as they provide crucial derisking for investors. All Latin American debt conversions to date have been structured with guarantees from the IDB, the US International Development Finance Corp or a combination of the two.
The deals to fund social projects could replicate other features of the Galapagos deal that were popular with investors, such as the buffer offered by the IDB's liquidity guarantee. "This is one of the largest improvements from a structural perspective, as it reduces risk around cashflow interruptions," Liberatore said.