Gabon has made history by closing the first debt-for-nature swap in continental Africa. This landmark deal comes as more developing countries are exploring innovative ways to address their debt burdens while contributing to conservation efforts.
The $500 million agreement, arranged by the Bank of America, not only lowers the interest rate on Gabon’s debt but also extends the repayment period. In return, the African nation has committed to investing at least $125 million in widening a marine reserve and reinforcing fishing regulations to protect endangered humpback dolphins.
The significance of this debt-for-nature swap goes beyond Gabon’s specific circumstances. Proponents of such deals believe that they have the potential to reshape the financing landscape for developing countries. These nations have long sought alternative means to cope with high debt financing costs and channel funds towards mitigating the uneven impacts of climate change. By combining debt relief with conservation commitments, Gabon’s initiative sets an inspiring precedent for other countries to follow suit.
One of the driving forces behind this debt-for-nature swap is activist investor Jeff Ubben, who is associated with organisations such as ExxonMobil and the UN climate summit COP28. Ubben has played a pivotal role in funding the debt team at The Nature Conservancy, a non-profit organisation that facilitated the arrangement of the Gabon deal. He believes that this collaboration between philanthropy, public funding, and private markets breaks down barriers and encourages more participants to invest in nature conservation efforts.
Gabon has secured a cost-effective deal, thanks in part to the backing of the International Development Finance Corporation and the involvement of Bank of America. This collaboration has enabled Gabon to access political insurance and decrease its debt repayments. A portion of the savings will be directed towards establishing an endowment fund for marine conservation, representing a significant step forward in preserving and managing Gabon’s marine resources.
Issuing “blue bonds” for this purpose has proven to be much simpler compared to previous efforts to generate revenue through carbon credits for forest conservation. Despite Gabon’s solid claims to these credits, selling them has been challenging. However, there is determination and progress in continuing down this path.
As a result of these developments, Gabon’s credit rating for restructured debt has significantly improved from CAA1 to AA2. Moreover, the country now benefits from extended repayment timelines with maturity dates replaced by a 15-year loan.
Investors have expressed caution regarding the Gabon deal, noting that it may not serve as a straightforward model for others to emulate. Initial market pricing indicates that the yield on Gabon’s bond will be around 6 percent, lower than the 10-11 percent yields on Gabon bonds in secondary markets.
However, this yield is also lower compared to many other agreements for emerging markets. Richard House, Chief Investment Officer for emerging market debt at Allianz Global Investors, believes that a similar deal would be highly beneficial for Kenya and other African countries facing debt challenges.
Despite this, some investors may view the Gabon deal as unconventional due to its complex structure and relatively low yield for emerging market investors. Additionally, concerns have been raised about the lack of clarity surrounding how savings are calculated and the opaque process involved in running the deal.
Thys Louw, an emerging market debt portfolio manager at Ninety One fund firm, also points out complications with the use of “blue” to describe Gabon’s restructured bonds since it typically refers to debt issuances specifically dedicated to marine conservation or water-related projects. Only time will reveal whether this deal proves advantageous in the long term.
Contrary to a typical “blue bond,” the bonds utilised for debt-for-nature swaps have the flexibility to be allocated towards both conservation-related projects as well as other ventures.
Gabon’s $500 million loan accounts for approximately 4% of its total debt burden, according to credit rating agency Moody’s. However, despite this successful fundraising effort, Moody’s has highlighted the persistently high credit risks associated with Gabon’s transition towards sustainability due to its heavy reliance on the oil industry, which contributes more than one-third of government revenue. Additionally, concerns were raised regarding weak public financial management and a history of outstanding payments to external creditors.
In contrast to Credit Suisse’s approach of privately placing bonds in deals worth over $1 billion in Ecuador, Barbados, and Belize, Bank of America opted for a public deal in order to enhance transparency and establish a more liquid asset class. Although acknowledging the complexities involved in this transaction, Bank of America expressed confidence that education on the matter would result in smoother processes going forward.
The CEO of the DFC (Development Finance Corporation), Scott Nathan, confirmed ongoing efforts to facilitate similar transactions following interest expressed by countries grappling with debt management goals while simultaneously addressing economic development and conservation concerns. However, he cautioned against perceiving this approach as a panacea for global debt issues given its relatively small scale within the overall global debt landscape.
