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Ecuador’s $650 million debt-for-nature swap targets Galápagos protection

The country has conducted the world's largest such swap in what is likely to be a template for others to follow

In a stroke of impeccable timing, just before descending into its most recent political crisis, Ecuador conducted its first debt-for-nature swap in early May – the largest in the world to date1.

Although the transaction itself did not significantly reduce the government’s debt stock, it was immensely valuable from a conservation perspective, permitting the authorities to utilise savings to finance conservation activities in the Galápagos.

Credit Suisse acted as global lead arranger for the transaction, facilitating a debt buyback and offering to purchase up to $800 million market value of Ecuador’s external bonds. Ultimately, investors tendered around $656 million at market value ($1.6 billion face value); shortly thereafter, a special purpose vehicle known as GPS Blue Financing DAC issued a “blue bond” for this amount directly to Credit Suisse, which then sold it on to investors at a yield of 5.645%2.

The blue bond received a rating of Aa2 from Moody’s, 16 notches above Ecuador’s sovereign rating, as it came with an $85 million guarantee from the Inter-American Development Bank (IADB) and $656 million in political risk insurance from the US International Development Finance Corporation (DFC), while 11 private insurers provided reinsurance.

This transaction will lead to a roughly 1.6% reduction of Ecuador’s non-financial public sector (NFPS) debt stock (Figure 1), equivalent to 0.8% of GDP. While the reduction in the overall debt stock is not material, the transaction itself enables the government to generate savings that will be invested in conservation efforts in one of the most environmentally diverse areas on the planet, home to many species that do not exist anywhere else in the world. According to the DFC, the transaction “will generate an estimated $323 million for marine conservation in the Galápagos Islands over the next 18.5 years”.3

Figure 1: Ecuador NFPS debt/GDP %
Ecuador NFPS debt/GDP%

Source: Ecuador Ministry of Economy and Finance, March 2023

The timing of this debt-for-nature swap was remarkable, taking place less than two weeks before President Lasso invoked the “mutual death” constitutional clause, resulting in dissolution of the National Assembly and triggering an early general election, which will result in a new president and Assembly before the end of this year4.

 

Ecuador’s political turmoil makes it unlikely that we will see another debt-for-nature swap from the country over the next couple of years. However, other governments are likely to follow its lead and that of those who went before it, such as Barbados5 and Belize6, using this template as a means of accessing the market, securing debt relief and investing in much-needed conservation efforts.

15 June 2023
Sarah Glendon
Sarah Glendon
Senior Research Analyst, Emerging Markets Debt Team
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Ecuador’s $650 million debt-for-nature swap targets Galápagos protection

1Inter-American Development Bank, Ecuador Completes World’s Largest Debt-for-Nature Conversion with IDB and DFC Support, 9 May 2023

2 Inter-American Development Bank, Ecuador Completes World’s Largest Debt-for-Nature Conversion with IDB and DFC Support, 9 May 2023

3Credit Suisse, Financial Close Reached in Largest Debt Conversion for Marine Conservation to Protect the Galápagos, 9 May 2023

4FT.com, Ecuador’s president triggers ‘mutual death’ clause to hold elections, 17 May 2023

5Bloomberg, Barbados Swaps $150 Million of Sovereign Debt to Save Sea, 21 September 2022

6IMF, Belize: Swapping Debt for Nature, 4 May 2022

 

 

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This document may be made available to you by an affiliated company which is part of the Columbia Threadneedle Investments group of companies: Columbia Threadneedle Management Limited in the UK; Columbia Threadneedle Netherlands B.V., regulated by the Dutch Authority for the Financial Markets (AFM), registered No. 08068841.

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Important Information

For use by professional clients and/or equivalent investor types in your jurisdiction (not to be used with or passed on to retail clients). For marketing purposes.

This document is intended for informational purposes only and should not be considered representative of any particular investment. This should not be considered an offer or solicitation to buy or sell any securities or other financial instruments, or to provide investment advice or services. Investing involves risk including the risk of loss of principal. Your capital is at risk. Market risk may affect a single issuer, sector of the economy, industry or the market as a whole. The value of investments is not guaranteed, and therefore an investor may not get back the amount invested. International investing involves certain risks and volatility due to potential political, economic or currency fluctuations and different financial and accounting standards. The securities included herein are for illustrative purposes only, subject to change and should not be construed as a recommendation to buy or sell. Securities discussed may or may not prove profitable. The views expressed are as of the date given, may change as market or other conditions change and
may differ from views expressed by other Columbia Threadneedle Investments (Columbia Threadneedle) associates or affiliates. Actual investments or investment decisions made by Columbia Threadneedle and its affiliates, whether for its own account or on behalf of clients, may not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not take into consideration individual investor circumstances. Investment decisions should always be made based on an investor’s specific financial needs, objectives, goals, time horizon and risk tolerance. Asset classes described may not be suitable for all investors. Past performance does not guarantee future results, and no forecast should be considered a guarantee either. Information and opinions provided by third parties have been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed. This document and its contents have not been reviewed by any regulatory authority.

In Australia: Issued by Threadneedle Investments Singapore (Pte.) Limited [“TIS”], ARBN 600 027 414. TIS is exempt from the requirement to hold an Australian financial services licence under the Corporations Act 2001 (Cth) and relies on Class Order 03/1102 in respect of the financial services it provides to wholesale clients in Australia. This document should only be distributed in Australia to “wholesale clients” as defined in Section 761G of the Corporations Act. TIS is regulated in Singapore (Registration number: 201101559W) by the Monetary Authority of Singapore under the Securities and Futures Act (Chapter 289), which differ from Australian laws.

In Singapore: Issued by Threadneedle Investments Singapore (Pte.) Limited, 3 Killiney Road, #07-07, Winsland House 1, Singapore 239519, which is regulated in Singapore by the Monetary Authority of Singapore under the Securities and Futures Act (Chapter 289). Registration number: 201101559W. This advertisement has not been reviewed by the Monetary Authority of Singapore.

In Hong Kong: Issued by Threadneedle Portfolio Services Hong Kong Limited 天利投資管理香 港有限公司. Unit 3004, Two Exchange Square, 8 Connaught Place, Hong Kong, which is licensed by the Securities and Futures Commission (“SFC”) to conduct Type 1 regulated activities (CE:AQA779). Registered in Hong Kong under the Companies Ordinance (Chapter 622), No. 1173058.

In Japan: Issued by Columbia Threadneedle Investments Japan Co., Ltd. Financial Instruments Business Operator, The Director-General of Kanto Local Finance Bureau (FIBO) No.3281, and a member of Japan Investment Advisers Association and Type II Financial Instruments Firms Association.

In the UK: Issued by Threadneedle Asset Management Limited, No. 573204 and/or Columbia Threadneedle Management Limited, No. 517895, both registered in England and Wales and authorised and regulated in the UK by the Financial Conduct Authority.

In the EEA: Issued by Threadneedle Management Luxembourg S.A., registered with the Registre de Commerce et des Sociétés (Luxembourg), No. B 110242 and/or Columbia Threadneedle Netherlands B.V., regulated by the Dutch Authority for the Financial Markets (AFM), registered No. 08068841.

In Switzerland: Issued by Threadneedle Portfolio Services AG, an unregulated Swiss firm or Columbia Threadneedle Management (Swiss) GmbH, acting as representative office of Columbia Threadneedle Management Limited, authorised and regulated by the Swiss Financial Market Supervisory Authority (FINMA).

In the Middle East: This document is distributed by Columbia Threadneedle Investments (ME) Limited, which is regulated by the Dubai Financial Services Authority (DFSA). For Distributors: This document is intended to provide distributors with information about Group products and services and is not for further distribution. For Institutional Clients: The information in this document is not intended as financial advice and is only intended for persons with appropriate investment knowledge and who meet the regulatory criteria to be classified as a Professional Client or Market Counterparties and no other Person should act upon it.

This document may be made available to you by an affiliated company which is part of the Columbia Threadneedle Investments group of companies: Columbia Threadneedle Management Limited in the UK; Columbia Threadneedle Netherlands B.V., regulated by the Dutch Authority for the Financial Markets (AFM), registered No. 08068841.

Columbia Threadneedle Investments is the global brand name of the Columbia and Threadneedle group of companies.

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