Why conservation bonds are an increasingly attractive financing option

Helped by a US$656mn financing by Credit Suisse, Ecuador repurchased around US$1.63bn of its external debt in bonds maturing in 2030, 2035 and 2040.

Negotiations took two years and the operation – the largest debt-for-nature swap in the world's history – concluded on May 9, involving savings of around US$1.1bn, of which US$450mn will be for protecting marine reserves in the Galapagos archipelago.

The operation advanced despite severe political risk, as President Guillermo Lasso resorted to a constitutional mechanism that allows him to dissolve the National Assembly and call an early election.

BNamericas talks to Diego Ramírez of Bustamante Fabara law firm, which was part of negotiating the operation’s legal structure, about the bond issue and the future of conservation bonds.

BNamericas: Considering that the bonds were launched two years ago, how complex were the negotiations?

Ramírez: Very complex because many parties were involved, from an environmental perspective and in the financial part, with the guarantees, and each in different time zones.

The ministries of economy, environment and ecological transition, foreign trade, industries and fisheries were involved, and obviously the foreign ministry also had a role.

It was a long negotiation, a very complex but successful operation, which took around two years, with periods of greater or lesser intensity, as happens in these innovative and complex operations, which require more time and dedication.

In the future, it may be easier to do similar transactions because significant groundwork has been completed.

BNamericas: Could other types of transactions take place, despite the frequent political problems?

Ramirez: Certainly. As has been demonstrated with this blue bond for Galapagos, the benefits are so important that they will always be an interesting option.

I don't know if it can be done very often because it also depends on the market and a series of conditions.

The foreign minister has mentioned the interest in carrying out a transaction related to the Amazon, which would be very important.

Blue or green bonds are relatively new. Ecuador issued a sovereign social bond in 2020, in which we also advised.

This transaction for Galapagos is also innovative and unprecedented, and there is no reason for this financial option to stop there.

BNamericas: Could other countries in the region follow Ecuador's example?

Ramírez: I think that because of the reception and because of the size of the resources, surely many countries will see an opportunity.

So, without a doubt, these transactions will continue, and it is possible that other banks, in addition to Credit Suisse, will begin to structure these types of operations. With possible changes, blue or green bonds will continue.

Private institutions already issue them, although with much smaller amounts.

In Ecuador, a private bank made a smaller issue in the past, in which we also advised.

The general trend is toward these bonds because social and environmental responsibility issues are of concern and interest to investors, who want to direct resources to these initiatives.

BNamericas: Where in Ecuador could these investors find more opportunities?

Ramírez: As foreign minister [Gustavo Manrique] said: a bond related to the Amazon.

Ecuador has such a mega biodiversity that the operation could be replicated, but there is also the social component, which is also very interesting.

It is not only the Amazon, because we have, for example, humid tropical forest and other areas. Regarding social issues, the bond could be linked to the improvement of some social or health indicators. The range is wide.

BNamericas: Why should investors be interested?

Ramírez: Because many advance policies that support this type of process, either related to the ecological transition or social responsibility.

Investors will obviously be looking for a return, and this structure has a return.

Regarding the bond issued by Ecuador, a political risk insurance by the US International Development Finance Corporation was applied and a guarantee of US$85mn from the Inter-American Development Bank, helping to reduce the interest rate on the financing cost.

BNamericas: What sectors could benefit?

Ramírez: Those that allow decarbonization, or industries that can change their way of producing to make it less polluting could think about issuing such bonds. Sectors that want to improve social conditions could also think about certain social bonds.

BNamericas: What about infrastructure?

Ramírez: These projects attract a lot of interest, not necessarily related to conservation bonds. But financing can be structured to fund large projects because there are investors, builders and operators.

BNamericas: How would the environmental issue be handled?

Ramírez: It would be necessary to ensure construction standards comply with environmental standards. That can make building more expensive but there will be an environmental benefit, that is, it is about investments with a purpose because it is about deciding between building with cheaper but more polluting material or with slightly more expensive material, but which is environmentally friendly.

Investors are increasingly betting on conserving the environment because that benefits us all.