By David Pilling
In mid-August of last year, the Gabonese government concluded a $500mn debt-for-nature swap, the first financial instrument of its kind in mainland Africa. Under its terms, money is freed up for marine protection by lowering the interest rate on Gabon’s debt — a feather in the cap for Ali Bongo, the then president, who had pinned his international reputation on his conservationist credentials.
When the deal was done, Bongo said: “I call on developed nations and our multilateral banks to multiply these sorts of initiatives, which could make a significant contribution to addressing the critical challenges of climate change and biodiversity loss.”
Within two weeks of signing the agreement, though, Bongo, whose family had ruled Gabon for 56 years, was ousted in a palace coup. He is now stuck in Libreville, the capital, while his wife and son are in prison.
But, while the Bongo dynasty may be gone, the debt-for-nature swap, so far at least, has remained. Indeed, one of the principal jobs of White & Case, the lawyers representing the Gabonese government in the transaction, had been to fashion a structure robust enough to survive just these sorts of political ruptures.
The law firm, which dealt mainly with Gabon’s environment ministry, had to convey to its client in clear terms precisely what Gabon was signing up to and the consequences of reneging on the terms of the deal — specifically on missing its conservation obligations.
“This deal in Gabon, and probably all other debt-for-nature swaps in general, requires lawyers doing some elements of non-typical lawyer work,” argues Olga Fedosova, partner at White & Case, who led the project.
“The role of the lawyers is also to help the clients to get comfortable with, and get a better understanding of, the commitments they undertake,” she says. “Environmentalists speak in a different language, so you have to translate financial concepts to them because the price of their non-compliance has a very important impact on the public external indebtedness of the country.”
Fedosova says it was vital that the conservation fund, in which money accrues over the life of the bond for conservation efforts, was independent of the state: “There are different things the country can do to prejudice the fund’s independence, but there are protections built in the structure to make sure that this independence is preserved.”
The swap was a complex transaction involving several parties. One was Bank of America, which arranged the $500mn blue bond, so-called because it is focused on ocean protection. Another was The Nature Conservancy, a US-based global environmental organisation that has backed previous blue bonds in the Seychelles, Barbados and Belize.
Under the deal, Gabon issued a bond of $500mn at a lower than normal interest rate and used most of the proceeds to retire more expensive debt. The savings on the interest have been earmarked for marine conservation.
However, Lee White, who was environment minister when the deal was being negotiated, says the transaction is not a bond in the strictest sense. “It’s really more of a debt restructuring,” he says from his home in Scotland, where he now lives after fleeing the country after the coup. “For a blue bond, you would generate money for sustainable management of the ocean, creating protected areas, increasing the sustainable catch of fisheries, and you would pay that bond back on the back of increased productivity,” he says. “That’s more, at least in my mind, what a bond is.”
Whatever the transaction is called, it achieved lower interest largely thanks to political risk insurance provided by the US International Development Finance Corporation, a development agency backed by the US government. That lifted the bond’s rating to Aa2 — against Gabon’s typical sovereign rating of Caa1 — and lowered the cost of borrowing to an interest rate of roughly 6 per cent against the 10 per cent to 11 per cent at which Gabonese debt normally trades.
In this way, the transaction aims to free up $125mn over the 15-year life of the loan, enabling Gabon to widen its marine conservation area and strengthen fishing regulations and protection.
Gabon has a diverse coastal and marine ecosystem, including many endangered species such as sea turtles, humpback dolphins and manatees. Humpback whales also use Gabonese waters to migrate north to their mating and calving areas.
But the country loses up to $600mn a year through illegal and unreported fishing. Now, Gabon has committed to several specific conservation milestones, monitored by The Nature Conservancy.
In financial terms, the blue loan divides Gabon’s interest repayments into three components. As well as the normal financial interest, which is the largest component, Gabon has to repay “conservation interest”, which generates funds for conservation, and “endowment interest”, used to fund an endowment account for long-term conservation projects beyond the life of the loan. The Nature Conservancy supervises the endowment account.
If Gabon fails to meet its commitments, that could lead to a default on the blue loan, potentially triggering cross-defaults on other debt — a significant incentive to comply.
And, if The Nature Conservancy judges milestones are not met, Gabon must make increased payments — lawyers studiously avoid the term “penalty” — which can later be funnelled into conservation.
However, unlike similar deals in which a country’s distressed debt was restructured in return for conservation commitments, Gabon’s debt was never in default, notes Fedosova. “Through this transaction, we broadened the scope of the instrument,” she says — making it a useful way of raising money for a wider range of other countries.
The way the transaction was structured, particularly the political risk insurance provided by the IDFC, “helped the transaction to sail through the storms”, she says.
The Financial Times
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