After a drought in dealmaking since late last year, as many as four new swaps may be completed by the end of 2025. — Bloomberg
ZURICH: Debt swaps pioneered by Credit Suisse to fund nature conservation are enjoying a second life, as bankers see an opportunity to apply the model to everything from post-war reconstruction to energy security.
The swaps help governments refinance debt at more favourable terms and put any savings toward a pre-determined policy goal.
After a drought in dealmaking since late last year, as many as four new swaps may be completed by the end of 2025, according to Jake Harper, senior investment manager, private credit at Legal and General Group Plc. But none of them has a nature-focused goal, he says.
The development feeds into a broader movement in environmental, social and governance, as investors and issuers stretch the label to cover areas they see as more relevant to the current geopolitical moment. Examples include efforts by Citigroup Inc to put together a deal to help Ukraine rebuild after the war.
Antonio Navarro, a former Credit Suisse banker and co-founder of boutique credit fund ArtCap Strategies, said the way debt swaps were structured made them well suited to responding to political developments.
“At the end of the day, these are policy instruments,” Navarro says. He launched ArtCap in 2023, the same year Credit Suisse was acquired by UBS Group AG in a state-engineered rescue.
This year, he’s been pitching an energy security swap that would channel savings into US oil and gas imports, as well as help finance the construction of liquefied natural gas plants in emerging markets.
Navarro began pitching such deals to multilateral development banks and the US International Development Finance Corp (DFC), a government agency, after Donald Trump’s return to the White House brought with it an agenda to revive America’s fossil-fuel industry.
Navarro declined to comment on how his efforts have been received.
US government priorities overseas look set to play a major role in shaping the market for debt swaps. DFC has offered political risk insurance on more than half the deals to have completed to date.
The United States is also a major shareholder in many of the multilateral development banks that help de-risk debt swaps to make them more palatable for private investors.
The DFC will likely be involved in Citigroup’s efforts to put together a reconstruction swap for Ukraine if it goes ahead, Bloomberg has previously reported.
The agency is already managing an agreement signed with Ukraine earlier this year that grants the US privileged access to new investment projects to develop Ukraine’s natural resources.
The deals generally target governments in developing nations looking for ways to reduce their debt burden in exchange for pledges to target sustainable goals.
Old debt is bought back, sometimes at a discount, with the repurchase paid for through the issuance of new bonds or loans.
Public agencies such as multilateral development banks are often brought in to provide risk mitigation in the form of guarantees on the new debt, to reduce the likelihood that private investors will lose money.
Their presence also helps keep the price of the debt down for borrower nations.
The deals, which are private, have faced criticism for their lack of standardisation when it comes to reporting both fees and savings.
Investors attracted to the market often focus on the environmental or social impact of their financial contribution. — Bloomberg
