2023-Public-Sector-Perspectives

So what are debt-for-sustainability swaps? A debt-for-sustainability swap is a structure that entails full or partial cancellation of a sovereign’s debt in exchange for its commitment to mobilize the resulting debt service savings (from both principal and interest) for the use of a sustainability-related project or outcome. To optimize the prospects for the structure to be successful (as was the case in Belize), an advisor can help to negotiate a debt discount with the creditors in exchange for development or conservation commitments (i.e., related to health, water, nature, energy, etc.). From an implementation perspective, the funding for the underlying projects is reliant on the size of the debt service savings stemming from the transaction as well as the sovereign’s commitment to achieve the targeted outcomes/KPIs. One of the attractive attributes of the debt- for-sustainability swap is funding the identified projects by utilizing local currency (which might be indexed to the USD) instead of hard currency. What are the types of debt-for-sustainability structures? There are two main debt-for-sustainability structures that depend on the participating parties: i. T rilateral/multilateral swaps: This type of debt swap, in addition to the creditors (private and official) and the debtor sovereign, also involves a third-party such as an NGO. Either i) the NGO (such as TNC in the case of Belize) offers concessional and/or non-concessional financing to the government and uses the proceeds to solicit and purchase the debt from creditors directly at a discount in exchange for project funding or, ii) the NGO purchases debt on the secondary market at a discount from face value and negotiates separately with the debtor government on the cancellation of the debt in exchange for project funding. In the case of Belize, Citi representing the government worked with the creditors to negotiate a proposal that helped reach the necessary tenders and used the concessional TNC financing to fully redeem the government’s external commercial debt in exchange for conservation commitments. Figure 7: Debt-for-conservation swap: Belize Transaction background • Following a severe drought and the Covid-19 pandemic, the Government of Belize came to the conclusion that its debt stock was unsustainable, and it was in need of cashflow relief. Indeed, with public debt standing at 126% of GDP and deep primary deficits, the IMF concluded in its Article IV consultations that “directors agreed that restoring debt sustainability requires sufficient debt restructuring and ambitious fiscal consolidation, anchored in a credible medium-term strategy“. • As an initial attempt to reduce cash outflows during the pandemic, in August of 2020 Belize successfully executed a consent solicitation to capitalize one year’s worth of coupon payments. However, as the grave impact of the pandemic materialized, Belize realized it needed more meaningful debt relief. One of the attractive attributes of the debt- for-sustainability swap is funding the identified projects by utilizing local currency (which might be indexed to the USD) instead of hard currency. • Belize thus invited the formation of a Committee of bondholders, representing just shy of 50% of holders, with which it engaged in good faith negotiations to reach a mutually agreeable outcome. • In parallel, Belize and TNC have been engaging in high level negotiations to develop a ‘Financing for Marine Policy’ Agreement, which commits Belize to certain specific, verifiable conservation policies in exchange for access to funding at concessional levels. The Arrangement would also provide a defined flow of funding for conservation projects and the establishment of a Conservation Endowment. • Belize reached agreement-in-principal with the Committee to repurchase the Superbond at 55%, which Belize financed with the funds from TNC. • To substantiate this agreement, Belize launched a Tender Offer and Consent Solicitation to repurchase the Superbond, and subject to 75% participation, exercise the Collective Action Clause to redeem any untendered bonds. • Belize was able to achieve 38% NPV savings and a 34% effective haircut with ~6.5 yrs extension in final maturity and ~4 yr extension in average life. • On September 24th, Belize announced successful Consent Solicitation results comprised of total participation of over ~84% of the original principal (well in excess the 75% minimum threshold). Citi Perspectives for the Public Sector 71