Bankers in the small but lucrative market for debt swaps are now struggling to complete deals.
Designed to help developing nations cut their debt burdens and protect the environment in a single product, the swaps are seeing potential borrowers hit the brakes, according to bankers and consultants interviewed by Bloomberg. With emerging-market bonds rallying, such deals often no longer make financial sense, they said. At the same time, some governments are skeptical of the environmental focus the swaps have, they added.
Antonio Navarro, a former Credit Suisse banker who’s now a managing partner specialized in such deals at boutique credit fund ArtCap Strategies, says the gains gripping emerging-market debt mean that “a lot” of the deals initiated in the past year are now being reconsidered, and in some cases have been put “on hold.”
Debt swaps, structured so as to lure private money by using risk-mitigation features such as public guarantees, have long been seen as a key plank in financing nature conservation in the developing world. As recently as May last year, BloombergNEF estimated there might be over $1 trillion of total debt eligible for such swaps. But since 2021, only about $6 billion worth of deals involving private capital have actually been completed, BNEF data show.
The products, which entail switching out old — often distressed — debt at more favorable rates, require months of “preparatory work including identifying the right projects, carrying out the scientific work, seeking the guarantee from a multilateral lender,” all of which comes at a substantial fee, Navarro said.
And under the current market conditions, with yields on a growing number of emerging-market government bonds near or even below those of US Treasuries, “the maths simply doesn’t work,” he said.
At the same time, issuers are growing increasingly dissatisfied with the environmental focus the deals have typically had, according to Bloomberg interviews with public finance representatives, bankers and lawyers involved in the transactions. The worry is that goals such as preserving mangroves are sidelining health and poverty-related challenges that local populations consider far more urgent, they said.
The development feeds into a wider shift in tone around environmental programs. Last year, billionaire philanthropist and Microsoft Corp. co-founder Bill Gates warned against letting climate concerns overshadow issues such as healthcare in poorer communities. In a memo published ahead of the COP30 climate summit in Brazil, Gates called for a “refocus on the metric that should count even more than emissions and temperature change: improving lives.”
Andrew Dabalen, the World Bank’s chief economist for Africa, says a key “weakness” of debt swaps targeting environmental goals has been “concerns about country ownership.”
Focus on nature-based targets was “always driven by either the guarantors of debt, or non-government actors,” he said in an interview. But for the products to have lasting value, “it has to be a government basically saying, ‘This is our priority. This is where we want to invest the savings in’,” Dabalen said.
Audrey Alevina, whose Gabon-based firm Alevina & Partners worked on the country’s $500 million debt-for-nature swap back in 2023, says many governments in Africa have long had an “ambivalent” attitude toward conservation finance. It’s generally been viewed as less urgent than “basic services like electricity, water, education, and healthcare,” all of which “remain critically deficient or entirely lacking,” she said.
Debt swaps have existed since the late 1980s, though deals back then were small and didn’t involve private investors. In 2021, Credit Suisse bankers teamed up with The Nature Conservancy, a nonprofit, to bring private capital into the mix. Banks to have helped arrange swaps in recent years include Bank of America Corp., JPMorgan Chase & Co. and Standard Chartered Plc. UBS Group AG, which acquired Credit Suisse in 2023, has also been involved in the market.
Private investors in debt swaps say there’s still demand for nature-related goals.
“Yes, the bonds might be tightening, but there will still be opportunities to replace expensive private debt that some sovereigns have taken on,” said Jake Harper, senior investment manager and emerging-markets private-credit lead at Legal & General Investment Management. He also cautions against lumping all emerging markets into one basket.
“There are, of course, different countries and different situations globally, and while we’ve seen an influx of capital into emerging markets, it’s important to look at which countries those are,” Harper said.
Ramzi Issa, a former Credit Suisse banker who played a key role in opening up the debt-swap market to private capital half a decade ago, says there’s plenty of room for growth.
“Even with the rally in the emerging markets, these types of transactions can still help countries to reach fiscal goals such as reducing their refinancing risk, diversifying funding sources, or flattening their repayment curve,” he said.
Issa, who’s now a managing partner at Enosis Capital, a boutique private credit firm he co-founded, says he and his team are “actively exploring opportunities with our partners in several countries across Africa, Latin America, and Asia.”
Marisa Drew, chief sustainability officer at StanChart, says criticism of nature-focused deals has centered on the notion that “they’re very, very prescriptive” for the borrower.
A debt swap “will have restrictive parameters associated with the use of proceeds for the very reason that you want to make sure that the desired impacts are delivered,” she said.
The market for swaps targeting environmental goals is also facing other headwinds. The US International Development Finance Corporation , once a major player in debt-for-nature swaps, has signaled reluctance to engage in such deals since President Donald Trump returned to the White House, according to conservation officials interviewed by Bloomberg.
The US “used to be a big player” but “it’s not a priority” for the current administration, says Thomas Sberna, coastal and ocean resilience head for east and southern Africa for the International Union for Conservation of Nature. Back in late 2023, Sberna had suggested it might be possible to raise $5 billion in swaps targeting conservation goals for the region he oversees. Now, “the enabling environment for that sort of operation is not the best,” he said.
Martin Callow, acting portfolio lead for nature bonds at TNC, said the nonprofit is “very keen to get through” what he characterized as a current “lull” in dealmaking. A key stumbling block, according to TNC, is the fact that the DFC has pulled back from guaranteeing debt-for-nature swaps.
A spokesperson for the DFC said it’s currently “looking at various development goals,” without elaborating further, in response to a Bloomberg request for comment.
Meanwhile, swaps targeting non-environmental goals are gaining ground.
Kenya and Benin are in talks for development swaps, Dabalen said last month. And World Bank President Ajay Banga told Bloomberg last year the institution was looking at nine development-focused swaps across Africa and Asia.
Kenya also completed a swap targeting food security in December, with the help of the DFC. And Angola’s finance ministry says it’s now planning swaps focused on health and education. A possible nature-related swap listed in Angola’s borrowing plan in mid-2024 wasn’t mentioned in the country’s latest official update.
Catherine Burns, managing director of NatureVest, The Nature Conservancy’s investment unit, says the nonprofit is “delighted” that debt swaps are now “providing an opportunity and model to achieve other types of benefits” beyond nature conservation.
“We’re having to do transactions a little bit differently and with some new stakeholders,” she said. “But we’re still moving forward.”
With assistance from Helene Durand.
This article was generated from an automated news agency feed without modifications to text.
