Pricing on a new bond backing Gabon’s debt-for-nature swap proved to be more difficult than anticipated due to broader rates volatility, but the buyback offer to fund ocean conservation got a good response, with more than US$1.1bn of bonds tendered and the African sovereign agreeing to accept close to its maximum US$450m.
The bond priced on Monday, a few days later than expected, via Bank of America with bankers closely scrutinising the overall transaction.
“The big question is – will it generate any meaningful savings?” said a sovereign debt specialist.
The US$500m August 2038 amortiser, with a 10-year average life, is said to have priced about 20bp wide of initial terms. The issuing entity, Gabon Blue Bond Trust Series 2, landed the note at 200bp over 10-year Treasuries.
The delay and wider pricing likely reflected rates volatility after a big sell-off in Treasuries last week following a one-notch downgrade of the US sovereign by Fitch. Bank of America declined to comment.
The bonds are rated Aa2 by Moody’s thanks to a political risk insurance policy from US International Development Finance Corp, which market participants said costs around 150bp.
The new issue, which priced at par to yield 6.097%, was bid at 101 after being made free to trade, according to a banker away from the deal. However, a second banker away put it nearly 10bp wider in the secondary market, though how many bonds are actually changing hands is debatable. Bankers reckon the buyers of the notes are likely to be rates desks at institutional money managers and hedge funds.
Gabon’s bonds trade at yields of 10%-plus in the secondary, so the new issue achieved a much better cost of funding than those levels. However, adding the estimated 150bp cost of political risk insurance could take the overall cost to around 7.50%, excluding fees and other expenses.
“If they are all-in at about 7.50%, it totally undermines the exercise,” said the first banker away, who said it no longer made sense given the average coupon on the bonds subject to the tender offer was close to 7%. "I really liked the concept but the costs, DFI fees, and final pricing are so punitive. It feels like most of the benefit of this structure has disappeared."
A third banker away had a different perspective. "They'll say they're buying 10%-plus bonds [the yields on Gabon's outstanding notes] and paying 7.50% all-in, and also reducing refinancing risk and extending duration. If it comes off it will be beneficial to the country."
Conservation savings?
Some bankers questioned how much benefit Gabon would get from the transaction before the deal priced, and the additional 20bp in final pricing will further squeeze the total savings available for marine conservation.
Before the deal priced, Moody’s said that the transaction would free up some US$125m for “biodiversity protection and nature-based resilience” and that the deal would provide annual funding of US$5m for the next 15 years and an endowment to meet later costs.
However, specialists were struggling to identify savings over the full life of the bond, as Gabon is replacing short-term debt with longer maturities.
Proceeds of the deal will be lent to Gabon (Caa1) via an intermediary to fund an up to US$450m tender offer of three US dollar bonds: its US$700m 6.95% 2025s; US$1bn 6.625% amortising February 2031s; and US$800m 7% amortising November 2031s.
The purchase price for the 2025s was 96.75 cents on the dollar, while for both 2031 notes it was 85, according to the offer announcement. The buyback on the 2025s was capped at US$150m.
In total, Gabon accepted about US$442m of bonds, with just over US$92.6m of the 2025s taken out, US$89.7m of the February 2031s and US$259.7m of the November 2031s.
Knowing these final costs is crucial to assess exactly what Gabon has achieved and whether its expectations were met. “Any cost saving is a good thing, even if it’s small,” said the second banker away from the deal ahead of pricing. However, some still question the value of the exercise.
“The buyback of the bonds is much closer to the principal value of the bonds, compared to Ecuador and Belize, which means the deal itself does not actually benefit the country much from a fundamental economic perspective, aside from perhaps a smoother debt profile,” said Mikhail Volodchenko, EM fixed-income portfolio manager at AXA Investment Managers, after the deal had been announced.
Ecuador and Belize have also undertaken debt-for-nature swaps.
Volodchenko said of Gabon that it was “interesting that the debt-for-nature swap actually focuses on lesser-known ocean biodiversity issues in the country, rather than continued efforts on rainforest preservation”.