Barbados blue bond to help Caribbean with liability management

For island economies looking to restructure sovereign debt, tapping into niche investor interest in marine biology was once seen as a solid strategy. Yet blue bond issuance has failed to take off since the Seychelles announced its inaugural $15 million deal for sustainable marine and fisheries projects in 2018. In the overwhelmingly green world of sustainable finance, blue debt-for-nature swap deals are still scarce.

Credit Suisse’s announcement of a $146.5 million dual currency blended finance blue loan for Barbados on September 21, is therefore significant. The deal was done alongside CIBC FirstCaribbean and build on the Swiss firm’s blue bond for ocean conservation transaction with the government of Belize last year.

The government of Barbados will use the proceeds for debt conversion, including a tranche of US bonds maturing in 2029, and local currency bonds series E. The first $100 million of the new blue loan is guaranteed by the Inter-American Development Bank (IDB), while the remaining portion is guaranteed by global environmental organization The Nature Conservancy (TNC), giving the deal a triple-A rating overall.

“If you compare the old debt to new debt, there is a substantial fiscal benefit because the government will be able to redirect debt service savings into marine conservation over the next 15 years,” says Ramzi Issa, global head of credit investor products structuring at Credit Suisse.

More specifically, savings will go towards the Barbados Environmental Sustainability Fund (BESF), a new vehicle looking to promote marine conservation on other sustainable blue economy-related projects. Setting up this fund was a requirement to get the IDB guarantee.

The partnership with TNC follows in the footsteps of Belize and the Seychelles and ensures large-scale and long-term management of marine natural resources.

“The beauty of this deal is that it works as a typical market transaction that is replicable and scalable,” says TNC’s sustainable debt director Daniel Ballesta, adding that the key challenge now is to find more guarantors for future transactions.

In 2019, TNC pledged to put $1.6 billion towards marine conservation over the following five years. The firm is exploring similar debt-for-nature swaps in the region, as more investment banks familiarise themselves with these types of deals.

“Five years ago, we would do a request for proposals and get two or three calls," Ballesta says. "Now we have at least 15 banks responding every time.”

Credit Suisse has also tapped into the Caribbean regional interest in ocean conservation financing. Belize’s $364 million blue bond, also with TNC, enabled the government to buy back all of its Eurobonds at a discount, facilitating a large reduction in debt stock. The country’s debt-to-GDP ratio fell by 12%, resulting in a credit rating upgrade from S&P.

But the bank faced questions about whether marine conservation driven deals were scalable and whether they could work without deeply discounted debt. With Barbados, the participation of a regional bank like CIBC FirstCaribbean was instrumental in facilitating local-currency financing.

IDB has been leveraging its sovereign guaranteed product to help governments gain conventional access to capital markets. In February, the development bank granted a $200 million policy-based guarantee to the Bahamas, with which the country issued the $385 million blue bond in June.

The fundamental nature of both deals remains the same, however.

Other Caribbean countries can see that these transactions are beneficial from a treasury perspective. Blended finance transactions create a budget capacity for necessary conservation programmes that have historically lacked funding and were always seen as a debt burden for governments.

In the case of Barbados, where the government was paying 8% for its domestic bonds and 6.6% for its Eurobonds, savings amount to over 200 basis points.

When the Seychelles deal was done, there were concerns over the regulatory and policy environment and whether the government’s definition of a blue economy would really serve local communities.

These anxieties are reflected in the conditions of Barbados deal. The Caribbean country committed to policy implementation to secure 30% of its exclusive economic zone (EEZ) to marine conservation by 2050, roughly 55 kilometres square. Currently, less than 1% of Barbados’s EEZ is protected.

The IDB policy-based programme is a cornerstone of its sovereign guarantee product.

“Issuing the guarantee is combined with the policy programme under which the government will have to enact certain reforms,” says IDB lead financial specialist Joan Oriol Prats.

If the government doesn’t meet its conservation commitments, it will have to make incremental payments into the BESF to provide remedies for not meeting these commitments. Once the goals are met, those payments will be released back to the government.

The purpose of these deals is to provide debt extensions with smaller annual payments. In the case of Barbados, the deal will mature in 2037, an eight-year extension from the 2029 Eurobonds.

In addition, a large part of the deal was agreeing on a clause allowing Barbados to defer payments for two years in case of a future pandemic as an additional measure to the existing natural-disaster clause the country had previously introduced in its domestic debt restructuring.

There is another business incentive to expanding the zone for marine conservation: generating environmental credits to help pay back the bonds. Regionally, several countries have started to tap into this market, including the Bahamas. The government plans to issue blue carbon credits from its coastal ecosystems, including mangroves and seagrass beds.

TNC’s director of the eastern Caribbean program, Sherry Constantine, says there is appetite, but Barbados first needs to collect enough data to know whether its natural capital is ripe for generating credits.

“Governments will need the financial resources to put in place measures for effective management of the protection zone, even after the 15-year program expires," she says. "If credits become a reliable mechanism for funding, then it will be worth exploring.”

Barbados is home to similar carbon sinks, and while it was not a focal point for this deal, it wouldn’t come as a surprise to hear of such plans in the future.