Gabon’s president spoke of his hope that the country’s debt-for-nature swap and blue bond will lead to significant growth in green or blue financial instruments as the close of the country’s US$500m blue bond was officially announced on Tuesday.
President Ali Bongo said that he hoped that the instruments would help countries like Gabon to protect critical ecosystems while also growing their economies, as debate continues in the market on the merits and cost of the structure and the savings achieved for conservation.
“I call on developed nations and our multilateral banks to multiply these sorts of initiatives, which could make a significant contribution to addressing the critical challenges of climate change and biodiversity loss,” he said.
Gabon’s debt-for-nature swap is the first from the African continent, the first sovereign debt refinancing in Africa to involve private creditors and the largest debt refinancing in Africa to fund ocean conservation, as interest in blue bonds and other debt-for-nature swaps continues to grow.
Bank of America, which led the US$500m blue bond that was used to buy back the country’s sovereign debt via a tender offer, said the debt exchange will free up US$125m of funding for ocean conservation.
However, The Nature Conservancy, a US non-profit organisation which is involved in the deal, put the figure higher at “an expected US$163m", reflecting ongoing uncertainty about the scale of the conservation savings and exactly how they have been achieved.
Conservation funding
The exchange will support Gabon’s commitment to protect 30% of its lands, freshwater systems and ocean by 2030 and provide annual funding of US$5m for the next 15 years, a relatively small amount for oil-rich Gabon, which has a diverse coastal and marine ecosystem.
Payments made by Gabon will be used to fund contributions to an independent conservation fund, with The Nature Conservancy as project manager and technical adviser, and pay into an endowment that will continue to fund conservation after the bonds are repaid.
Gabon’s exchange is the highest amount of new debt raised for a project supported by TNC, which has previously supported similar exchanges in the Seychelles, Belize and Barbados for marine conservation.
BofA said that it was the sole initial purchaser, structuring agent and bookrunner on the US$500m blue bond and sole dealer-manager for a tender offer which used the blue bond proceeds to repurchase some of Gabon’s existing sovereign US dollar-denominated Eurobonds.
The US$500m August 2038 amortiser with a 10-year average life issued by Gabon Blue Bond Trust Series 2 priced about 20bp wide of initial terms at 200bp over 10-year Treasuries after a delay amid broader rates volatility. The deal priced at par to yield 6.097%.
The bonds are rated Aa2 by Moody’s due to a political risk insurance policy from US International Development Finance Corp, which enhances the credit rating of the bond from Gabon’s Caa1 rating.
Gabon's bonds trade at yields of 10%-plus in the secondary market, so the new issue achieved a much better cost of funding from a liability management perspective.
“The Gabon blue bond illustrates how DFC can effectively lift the credit profile of a bond issuance to deepen capital markets,” said DFC’s CEO Scott Nathan in a statement.
DFC also put the amount of savings achieved at US$125m.
Complex and expensive
Although the concept of debt-for-nature swaps remains popular as a way to create money for conservation without increasing sovereign indebtedness, they remain controversial, as high transaction costs to a waterfall of counterparties eat into the savings otherwise earmarked for conservation.
Paul Donofrio, vice-chair of BofA, said in a statement that he hoped “the transaction will serve as a blueprint that can be scaled for other countries interested in improving the sustainability of their debt, while putting global capital to work in enhancing natural capital".
However, the deal's execution and ongoing questions around the savings achieved and cost of the structure highlight the fact that work is still needed to increase the speed and scaleability of future blended conservation deals.
Debt advisers are struggling to identify savings over the full life of the bond, particularly as Gabon is replacing short-term debt with longer maturities.
"It looks to us as though this transaction actually generates negative cashflow savings overall given the fact that the new 15-year instrument replaces relatively short-dated debt. It therefore cannot really be seen as a debt-for-nature swap. This really is a standard liability management transaction," a sovereign debt specialist said.
"The key thing here, though, is that the cashflow savings are not being generated by the swap itself,” he said, adding that even if assessed on a liability management basis, Gabon's approach is questionable, as it has locked in high rates for 15 years at what may prove the top of the cycle.
BofA officials were not immediately available for comment.