Barbados is putting sustainability-linked bonds at the core of its next-generation debt-for-climate transaction, reinforcing its leadership in development finance after an earlier landmark debt-for-nature swap and the country's “Bridgetown Initiative”.
The Caribbean sovereign and three multilateral development banks backing its new deal will finalise key performance indicators for its US$295m SLB this week, according to a senior government official.
In an exclusive interview, Ryan Straughn, a minister in the finance ministry, said Barbados will issue a request for proposals on the SLB early in 2024 and expects to bring the SLB in the first quarter.
The sovereign, which would become only the third to issue in KPI-linked bond format (though South Africa is also on the way), has already seen strong appetite from banks to take part in the deal.
“The interest is there,” Straughn said.
Chicago-based asset manager Nuveen may anchor the transaction, as it did for Barbados’ earlier blue bond.
The full deal will be guaranteed jointly by the Inter-American Development Bank and the European Investment Bank under the European Union’s “Global Gateway” initiative to support developing economies. The EIB’s involvement is significant as the Luxembourg-headquartered development lender has not been involved in similar policy lending before and had to secure a backstop from the European Commission to allow its participation, according to sources.
The SLB will finance a buyback of the sovereign’s most expensive remaining debt after its liability management exercise in September 2022. This involved a blue loan and bond that financed a buyback split equally between domestic and international debt.
Barbados’ debt management office estimates that the new buyback funded by the SLB will generate savings of US$125m over 15 years, enabling it to service some US$100m of new debt from the Green Climate Fund (US$40m) and IDB (US$60m) to upgrade its South Coast Sewage Treatment Plant over the next six months. Straughn described the financing as “very concessional”.
In a country which saw an unprecedented four months of water restrictions this year, the upgrade could supply an additional 5m gallons of drinking water per day. It will also benefit Barbados’ largest nature conservancy, a bio-diverse mangrove area near the plant, as well as its offshore environment. The plant has been pumping untreated sewage into the ocean.
This use of interest savings to finance broad environmental and economic resilience, including water and food security that the new plant will enable, marks a notable step forward. The sovereign’s earlier swap was more narrowly focused on marine conservation.
"The critical thing is that we're shifting the focus to the construction and development of critical public infrastructure that is essential for responding to climate challenges,” said Sebastian Espinosa, managing director at White Oak Advisory, which is advising Barbados on the new transaction.
“We're moving away from the standard [debt-for-nature] model under which lots of small conservation projects are funded over a long time," he said.
“The beautiful thing is that it is part of our integrated climate strategy,” Straughn said, calling the plant upgrade “of huge strategic importance to Barbados from a climate and water perspective”.
Espinosa said the transaction will enable Barbados to reap the benefits of its interest savings over 15 years immediately. "We've found a way to front-load the savings. So rather than having them spread out and drip-fed in small increments over a 10 to 15-year horizon, we will be accelerating them and getting the full benefit upfront. The people of Barbados will feel the impact here and now."
It should also be cheaper than Chinese financing associated with the country's Belt and Road Initiative, a person familiar with the discussions said.
“In effect, Barbados is going to get a state-of-the-art water treatment plant for free, courtesy of the savings from the debt swap,” Espinosa said, noting that at the same time the country “does not need to wait to get this critical piece of climate-resilient public infrastructure".
Espinosa said this precedent could create liability management opportunities for other sovereigns too. “This has implications not just for Barbados, but for the design of debt swaps more broadly.”
"Debt-for-nature" and "debt-for-climate" swaps are designed to generate savings via cheaper debt for specific conservation or climate-related purposes. Ecuador completed a record US$1.6bn deal in May, and that was followed in August by a US$500m transaction for Gabon.
Straughn did not comment on the likely deal structure, beyond noting that an emissions measure is possible. But the SLBs are strongly reminiscent of the contingent resiliency-linked bond concept recently floated by the Anthropocene Fixed Income Institute and the United Nations Office for Disaster Risk Reduction.
Barbados underwent its first debt restructuring in 2018 and is seeking to reduce its debt-to-GDP ratio to 60% by 2035. It is already considering its next liability management moves to generate further “fiscal space”, Straughn said.
Working with other multilateral development banks has identified “a few opportunities”, he said. “Any opportunity to redirect resources to advance the building of resilience, we will explore.”