2023-Public-Sector-Perspectives

Background on debt-for-sustainability swaps Debt-for-nature or what should more appropriately and generally be termed “debt-for-sustainability” swaps have gained increased attention among sovereigns as a way to achieve desired environmental and developmental outcomes while improving their debt dynamics. Even though these types of transactions are not new, the recent pick-up in interest reflects a greater focus on debt sustainability given the higher levels of government debt accumulated both before and during the COVID-19 pandemic, as well as growing awareness from the buy-side of the importance of ESG themes in financing discussions. As global monetary normalization is creating increased funding challenges and liquidity stresses for many sovereigns, we expect such instruments to play a growing role in their financing tool kits. Figure 6: Debt swaps could address various stakeholders’ goals and agendas One of the first debt swaps was executed in 1985 in Chile and was in the form of a debt-for-equity swap. Later in 1987, the first debt-for-nature swap was executed in Bolivia with the involvement of several NGOs (The Nature Conservancy, Conservation International and World Wildlife Fund). Since then, more than 100 transactions have been realized, but the ticket sizes remained very small. By 2000, an estimated US$4.2 billion of official debt had been swapped for local currency instruments, encompassing over US$2.2 billion in debt-for-equity swaps, US$1.6 billion in debt-for-nature/ environment swaps and US$0.4 billion in other debt structures. Most of these transactions were executed on a bilateral basis. Recently the largest “debt-for-conservation” transaction was executed in Belize exceeding US$350 million with the involvement of The Nature Conservancy (TNC) and the U.S. Development Finance Corporation (DFC). Citi, as the financial and ESG structuring advisor for the Government of Belize , assisted in conducting a debt sustainability analysis that helped to quantify its financing needs and paths toward improved debt sustainability. This encompassed an analysis of the existing debt structure, potential haircuts and several proposals for the evolution of the future interest burden in order to negotiate more viable terms with the various stakeholders. Citi helped Belize restructure all its outstanding external commercial debt and led the dialogue with bondholders regarding the rationale and valuation of the redemption price, while concurrently negotiating with the parties involved in the TNC Impact loan. 70 Debt-For-Sustainability: Addressing Debt Pressures and Achieving SDG Goals