Overview
Earlier this year, my colleague Kris Atkinson explored how the blue bond market, currently a small fraction of the sustainable debt universe, could one day help tackle the conservation crisis engulfing the coastal regions of developing nations.
A new Gabonese “debt for nature swap” blue bond shows promising signs of the development of that market.
As with previous blue bonds, funds raised should help protect the country’s biodiversity and nature-based resilience against climate change by channelling investors’ capital into sustainable ocean-focused projects. But whereas the impact of previous issuances has been limited, this deal allows Gabon, with a Caa1/B- sovereign credit rating, to issue an Aa2-rated bond thanks to a $500m political risk insurance policy from the US International Development Finance Corporation (DFC).
Combined with an associated $500m liability management exercise buyback of short-dated Gabonese external debt, the structure helps push out near-term dollar refinancing and liquidity risks for the junk-rated issuer.
As a result, Gabon will pay just over 6 per cent on the bonds, which have a 10-year weighted average life, making this issuance considerably cheaper than the 10.25 per cent yield at which equivalent Gabon conventional dollar debt is currently trading. Gabon plans to use savings provided by those lower yields - expected to be around $125m - to finance a variety of marine conservation projects selected and executed by The Nature Conservancy, a global environmental non-profit organisation.
Why is this important? First, the DFC’s support provides both scale and security. These have made the bonds more attractive to global investors, and the reduction in risk premia paid by Gabon means the size of the issuance can attract global private capital, which has so far found little opportunity to invest in emerging market climate debt. This will be by far the highest profile EM sovereign benchmark size deal launched to date in the blue bond era.
The deal does have some drawbacks. The DFC credit guarantee is not 100 per cent foolproof; it covers the principal of the bond, but not the coupons between now and maturity. The new bond is also likely to suffer from poor secondary market liquidity and is unlikely to enter mainstream EM debt benchmarks. However, it is still around 130bp cheaper than the equivalent rated spread in US corporate credit and EM sovereign debt.
Moreover, the Gabonese issuance offers a reminder to investors of how the growing impact of climate change is disproportionately affecting the developing world.
Countries like Gabon depend on their rivers and oceans for food and water, and the livelihoods of its forest-dwelling ethnic groups are directly entwined with the health of its ecosystems. But the glacial pace of behavioural change on everything from carbon consumption to biodiversity is forcing many emerging markets to face the reality of the world missing its Paris Agreement commitments and facing further destruction of biodiversity.
Climate resilience and adaptation is therefore a priority for many emerging markets. This will come at great cost, but following years of pandemic, global inflation, and rising US yields, a large number of these countries head into this uncertain future as deeply distressed credits. Cut off from international markets, they will struggle to access the required funds on their own.
The Gabonese issuance provides one example of how public and private sectors can combine to help plug this sustainability financing gap.
That appeal is clear: several African and Caribbean nations, together with Sri Lanka, have been touted as likely future borrowers using this template. I hope that others can follow in their footsteps.
