Just a few years ago, Credit Suisse was the only commercial bank arranging debt for nature swaps. — Bloomberg
LONDON: About nine banks are currently vying for a regional share of an environmental, social and governance (ESG) debt market that Barclays Plc estimates has the potential to grow to US$800bil.
Just a few years ago, Credit Suisse was the only commercial bank arranging debt for nature swaps, bringing in private investors to help sovereign refinancings tied to nature conservation commitments.
Last year, Bank of America Corp became the second global lender to join the market when it completed a deal for Gabon.
And Goldman Sachs Group Inc, HSBC Holdings Plc, Citigroup Inc, BNP Paribas SA, Standard Chartered Plc and Barclays have all signalled they’re exploring similar transactions.
“We see different banks very well prepared to undertake this type of transaction,” Joan Prats, lead financial specialist at the Inter-American Development Bank (IDB), said in an interview.
“It’s impressive how they’ve responded to this market opportunity.”
He said IDB is aware of “eight or nine” banks that are currently looking at debt-for-nature swaps in Latin America and the Caribbean alone.
Such deals are a form of what’s known as blended finance, whereby private investors are persuaded to enter risky markets made more attractive with guarantees and other de-risking tools provided by multilateral development banks such as IDB.
The Washington-based group is currently in talks regarding several deals, Prats said.
“We are having very active discussions and on different topics,” he said. That includes expanding the marine conservation focus that has characterised past deals to include forestry, he said.
The IDB has been a key actor in arranging such swaps, in which it has typically taken care of repayment guarantees, while US International Development Finance Corp has offered political risk insurance.
Deals arranged by Bank of America and Credit Suisse, which was absorbed into UBS Group AG last year, have so far been bespoke affairs arranged around the individual circumstances of specific borrowers.
The goal was to achieve environmental impact rather than to make it easier for private investors to get involved, according to bankers close to those transactions who asked not to be identified by name discussing sensitive considerations.
At the same time, the swaps that have been arranged to date have raised questions around how effective they were at bolstering environmental projects.
Tackling debt and environmental goals together is challenging, said Maggie O’Neal and a team of analysts at Barclays.
Deals are “not always a win-win” and “allocations to environmental projects can fall well short of amounts saved in debt repayments,” they said.
Prats at IDB said the methodology around debt-for-nature swaps is now being “standardised.” While Credit Suisse bankers were “pioneers,” it’s now “a more open market, and that’s good,” he said.
The pool of institutional investors in such swaps has so far been limited. Nuveen, a unit of the US’ TIAA, as well as Legal & General Investment Management and Nordea Asset Management are among a small handful of investors to have bought debt-for-nature swaps in the past two years.
Other major investors said they’d like to see changes in how such deals are structured before they consider buying the swaps.
The products were “a great idea originally but it’s difficult to really find the target audience,” said Viktor Szabo, investment director for emerging markets debt at Abrdn Plc.
“They’re typically small, illiquid and not really yielding structures so not really a good fit for our portfolios.”
Fund managers also have found the swaps difficult to allocate, given their emerging-market status combined with Treasury-market yields. — Bloomberg
