The recent coup in Gabon has shocked the financial world, particularly affecting the innovative debt and natural exchange arrangements.
Just two weeks before political turmoil, bank of america corporation.completed 500 million dollars Agreement with Gabon. The African country had agreed to undertake marine conservation efforts in exchange for more favorable loan terms.
A debt-to-nature swap or climate swap is a deal that allows countries to restructure their debt at lower interest rates or longer repayment terms. And that’s in exchange for debtors’ promises to fund conservation and climate-related initiatives.
safety net
The Gabon deal was unique because it included a political risk insurance contract with Gabon. U.S. International Development Finance Corporation (DFC). The insurance will act as a safety net for creditors in case Gabon defaults on its loans or fails to meet its security obligations. This is a key feature that attracts investors who normally avoid emerging markets.
Tis Lowe, a portfolio manager at NinetyOne, said the situation, especially in the aftermath of the coup, was “untested.”
Soldiers took power in Gabon following a chaotic presidential election, triggering a record drop in the country’s international bonds, most of which are rated junk.
But bonds associated with debt-to-nature swaps, rated Aa2 by Moody’s Investors Service, are more resilient.
Nevertheless, a cloud of uncertainty hangs over Gabon’s ability to finalize the deal, both in terms of debt repayment and environmental protection.
Officials are now scrambling to gather more information about the coup’s impact. Both Bank of America and Gabon’s environment minister remain silent, but the soldiers at the helm have vaguely promised to abide by all international agreements.
Bianca Shihed, Public Relations Officer nature conservation organizationunderlined the organization’s commitment to closely monitor the situation, taking into account Gabon’s ecological importance.
Since 2016, the organization has organized three natural debt exchanges involving Seychelles, Belize and Barbados.Because of these transactions, the organization made a transformation 500 million dollars of debt $230 million Money for conservation.
Before the Gabon deal, Credit Suisse was the dominant player in the natural debt swap market. Other global banks, including HSBC and Citigroup, have now expressed interest, and analysts are estimating the market’s reach. $800 billion.
But these deals are not without their detractors. Questions have been raised as to whether these truly meet the ‘blue’ label standards for marine conservation.
morning Call
Sebastian Espinosa, managing director of White Oak Advisory, said the coup was a wake-up call for the industry. He warned that countries with unstable political or economic conditions may not be reliable partners for long-term environmental efforts.
Gabon announced plans to enter the natural debt market in October last year.
In addition to African countries, many other developing countries have also expressed their intention to enter the market. For example, the island nation of Cape Verde is planning a climate change debt swap. Colombia also considered this type of climate change funding in exchange for protecting the Amazon rainforest.
At the COP27 summit, several other countries, including Gambia, Pakistan and Kenya, also expressed interest in supporting climate swaps.
However, the emerging market for climate debt swaps is a niche market due to high transaction costs. Furthermore, the project needs to be closely monitored and the debtor needs to be committed to the scheme on a long-term basis.
Gabon’s first coupon payment is scheduled for February 1, and failure to pay could trigger DFC insurance, subject to arbitration. As seen in the country’s bond prospectus, the DFC is “ 100% “Loss” is approximately $522 million. This coverage includes the full amount of principal and interest.
In conclusion, the Gabon coup serves as a stark reminder of the risks associated with innovative financial products such as natural debt exchanges. This highlights the need for investors and stakeholders to conduct thorough risk assessments and due diligence before stepping into such transactions.
With billions of dollars and important environmental initiatives at stake, the situation in Gabon could very well be a turning point for the emerging natural debt swap market.