About seven years ago, the people of… Nature conservation (TNC) were looking for a way to tackle a problem: Governments in many developing countries wanted to protect their natural resources. But they lacked the funding power to do so. “There was not enough money globally to enable countries to achieve their conservation goals while providing a sustainable flow of funding to do so,” said Steve Valdes-Robles, senior attorney at TNC.
Finally they came up with the Blue Bonds for Ocean Conservation program, a massive debt refinancing project with the government of Belize, which agreed to a long-term commitment to ocean conservation. The $364 million debt conversion reduced Belize’s debt by 12% of GDP, created long-term sustainable financing of approximately $4 million per year for conservation, and excluded a commitment to protect 30% of Belize’s ocean , among other conservation measures.
The project also recently won the 2022 Grunin Prize for Law and Social Entrepreneurship, which rewards the work of lawyers to advance the fields of social entrepreneurship and impact investing. About 10 law firms were involved in the initiative in one way or another.
The first step was a pilot in the Seychelles, which concluded in 2016. TNC financed about $20 million in government debt, which the government sold at a discount of par. “It was a pilot to see if we could make this work,” says Valdes-Robles.
After that, the next stage was trying to restructure any commercial debt, such as Eurobonds, that a country might have. The aim was to get countries to restructure debts that usually had less favorable terms with higher quality debt at lower interest rates. The key to that was finding credit support.
With that in mind, TNC approached multiple development finance institutions (DFIs) around 2018 to see if they would be interested in working together. TNC’s pitch was this: the DFI would offer credit enhancement to a country with outstanding debt trading at a discount to par. Then TNC would raise money and eventually reduce that debt, at a lower interest rate. Some of those savings would pay for conservation measures, especially efforts to protect that country’s territorial ocean.
Enter the US Development Finance Corp., which offered a product called political risk insurance. (Back then it was called Overseas Private Investment Corp.). Originally designed to protect infrastructure, think of a manufacturer building infrastructure in a politically uncertain region, it would be used to protect other risks.
Find a country
From there, in 2020, with a plan for receiving credit support in hand, TNC entered into talks with countries that may be interested.
Belize, with an economy that relies on tourism, was hard hit by the pandemic. The country was in default and in talks with creditors. In addition, the government needed ways to more effectively manage the country’s ocean. “There was an opportunity for us to help them withdraw their Eurobonds and get out of this debt that had taxed their economy for a long time,” said Valdes-Robles.
a long way
Working out a deal didn’t happen overnight. TNC began talks with Belize in the summer of 2020 and closed in November 2021. That’s partly because the country had elections in the midst of negotiations. So talks were suspended and then resumed with a new government. In addition, they had to familiarize several other parties with the approach. For example, bankers representing Belize were reluctant to get involved in a new, potentially risky approach. “This is not something that normally happens in the sovereign debt space,” Valdes-Robles said. “We had to reassure them that this was legit.” In addition, TNC had to work out the mechanism together with its bank. At the same time, Belize did a debt sustainability analysis to see what the government could afford and it took a while.
Then there’s something known as a “cramdown provision,” a special feature in the world of sovereign debt. If 75% of bondholders agree to something, the remaining 25% can be forced to accept the change. That meant Belize had to negotiate with its bondholders.
Conservation Finance Agreement
TNC also had to develop the mechanism for a preservation component. That had to be covered by a conservation financing agreement, which had to be drafted from scratch. In fact, it was a contract in which the government of Belize agreed to take certain conservation measures, such as protecting part of the oceans.
As part of the overall agreement, the government will take some of the savings from the restructuring to make regular payments to the conservation fund over the next 20 years. A subsidiary sows the money, which is then given as a grant to a local organization called the Belize Conservation Fund. It is led by a council made up of a majority of independent members, along with representatives from the government and the TNC. Anyone can apply for a scholarship, including the Belize government.
Belize makes quarterly payments that go toward conservation, in addition to semi-annual debt service payments. There are also conservation milestones that will occur at different times. Ultimately, it will take eight years to reach those conservation goals. “This is a long-term commitment by Belize and The Nature Conservancy to work together and develop these protections,” said Valdes-Robles.
As for the debt to bondholders, it was written off at 55 cents on the dollar when the transaction closed. (The face value of the Eurobond was $553 million). TNC loaned the government $364 million to pay off their debts, along with other liabilities. The direct savings on principal amounted to no less than 12% of GDP.
Now TNC is working on three other deals that, Valdes-Robles says, are a lot less complicated than the situation in Belize. Moreover, the approach now has a track record. “When we closed Belize, other development finance institutions became interested,” says Valdes-Robles. He also knows of two other NGOs that are talking to different countries about taking similar steps.