Gabon finalises first debt-for-nature swap in Africa

Gabon closed Tuesday the first debt for nature swap in continental Africa. This is a sign of how more developing countries are looking to agreements that will funnel money into conservation and reduce their debt burdens.

The $500mn agreement, arranged by Bank of America lowers the interest rates on Gabon debts and gives the country more time to repay. In return, the African nation has committed to spending at least $125mn on a marine reserve expansion and strengthening fishing regulations that could help protect endangered Humpback Dolphins.

The proponents of these deals hope that it will create momentum for a reshaping of the financing landscape in developing countries. These countries have been calling for new ways to reduce their high debt costs and to free up funds to be spent on mitigating climate change’s uneven impacts.

According to activist investor Jeff Ubben, the Gabon deal represented a way to “knockdown” the divide between public funding, philanthropy and private markets.

Ubben is a member of the board at ExxonMobil, and he’s also part of the advisory group for the UN Climate Summit COP28. He has funded the debt team of The Nature Conservancy which facilitated the deal.

He said, “It is the hardest thing in the world to invest money [in] protecting nature.” “[But] once you have enough use cases, and participants feel comfortable with it, then the technology really takes off.”

The International Development Finance Corporation (IDFC), a US-backed development agency, will provide political insurance to make the deal cheaper for Gabon. The deal was arranged through Bank of America. This bank has seized a market that had been dominated by the collapsed Swiss Bank Credit Suisse.

Lee White, Gabon’s Minister of Water, Forests, Sea and Environment, said that the deal will marginally reduce the country’s repayments on its debt.

A portion of the savings will go into an endowment for marine conservation. He said, “This is the first sustainable funding to preserve and manage Gabon’s ocean resources.”

White said that issuing “blue bonds”, so-called because they have an ocean theme and can be added to sustainable investment funds, was far easier than the long-standing attempts to generate payment for the conservation Gabon’s forest through structuring and sales of carbon credits.

He said that although Gabon’s claims on such credits were more robust than those of other schemes discredited, it was difficult to sell. He said that although the road has been rocky, they are still on it.

Credit rating for Gabon’s debt restructured rose from CAA1 to AA2. Gabon has also been given more time to repay debts, since bonds that were due to mature between 2025 and 2030 have been replaced by a 15-year term loan.

Investors have warned that the Gabon agreement may not be a model for others to copy. Initial market pricing indicates that the yield on Gabon’s bonds will be around 6 percent. This is lower than secondary markets where Gabon bonds yield between 10 and 11 percent, but lower than other emerging market agreements.

Richard House, Allianz Global Investors’ chief investment officer of emerging market debt, says that a similar deal could be “massively beneficial” for Kenya. The country has a $2bn debt due for refinancing in the next year.

He warned, however, that investors might see the Gabon deal “as a bit orphan,” because of its complex structure. The yield is low for investors in emerging markets, but high for investors who are used to only buying investment grade bonds. Only time will tell whether it is beneficial in the long run.

Thys Louw is emerging market debt portfolio director at Ninety One. She said that the deal has many drawbacks, including its complex structure, “opaque processes” and “lacks detail” regarding how savings are calculated.

In a joint press release by Bank of America and Gabonese officials, DFC, TNC, and a Gabonese Minister, they repeatedly refer to Gabon’s restructured debt as “blue”.

The term “blue bonds” is used to describe debt issues where the entire amount raised must be spent on water or marine conservation projects.

The bonds that fund the debt-for nature swaps are different from a “blue bond” in that they can be used for projects unrelated to conservation.

According to Moody’s, Gabon’s total debt is approximately 4 percent of the $500mn loan.

Moody’s warned that Gabon faced “high credit risk” due to its dependence on oil for more than one-third of its government revenues, despite the fundraising. Moody’s warned of the “weak” public financial management and “persistent arrears” to external creditors.

Persons close to Bank of America have confirmed that the bank decided to make the deal public, instead of placing the bonds in private, as Credit Suisse did with deals in Ecuador and Barbados, worth over $1bn. The bank did this in order to increase “transparency” and create a liquid asset class. The person admitted that the deal was “complicated,” and added: “Once people are educated, we expect them to be more streamlined.”

Scott Nathan, DFC’s CEO, said that the bank is working to get similar transactions through after receiving interest from other countries with “debt-management goals, economic development, and conservation concerns”. He cautioned, however: “I do not think this is a solution for the global debt problem. . . It’s only a small percentage of the total global debt.”