Clean Up Your Water And We’ll Lower Your Debt

upwards of a trillion dollar market. Now today we're talking about a different kind of eco friendly deal that's starting to take off. It's called a blue bond, as in blue like water. The U S environmental group, the Nature can Servancy, has teamed up with banks to offer certain countries a deal. They'll help them get out from under crippling debt if they agree to tackle polluted coral reefs

and other dirty water systems. These kind of agreements are also called debt for nature swaps, and they've been around for decades. The Nature Conservancy's Blue bond model, which focuses on water, is just one way to do it. So far, a handful of countries have signed up, including the Sayshells Barbados and belize they are really complicated deals and it's not always clear who benefits the most. My colleague Sydney Mackie in New York has been digging into them, and

she joins me now to tell us how it works. Sydney, thanks for being here. Happy to be here. Blue bunds can be a little bit intimidating to try to understand. Can you give us a simple explanation of what they are? Yeah. So, oftentimes when a government is trying to find ways to raise money very quickly in order to prop up their economy run projects that are important to the nation, they will turn to Wall Street in order to do that, and they'll essentially sell bonds and raise debt in order

to very quickly get US dollars. But that tends to be pretty expensive, and so after a while, if a very large sum of debt has piled up, just like you or me and our credit card bills, it can get unwieldy, and so a government will sometimes try to find some kind of alternative solution to pay back its debt if it's too much um and that's where blue

bonds come in. So for certain countries, especially those that have really high debt loads but also are located along the coast or have very ocean dependent economies that run

on tourism or fishing. That's where we're seeing opportunities for these new investment vehicles called blue bonds, and essentially for these governments, they're opportunity to take some of this very expensive debt that they've borrowed from Wall Street and swap it for what is theoretically a more affordable loan through a US based charity called the Nature Conservancy, which is working with a headful of other banks, including Credits SWEEZ and the upshot of all of this is essentially that

the savings between the more expensive debt and this new or less expensive quote unquote blue debt will be used to fund certain nature saving measures, so ocean conservation, new phishing laws, things that theoretically will help to offset pollution and climate change in those ocean based economies. So essentially, what they're sort of doing is refinancing their debt and then keeping the amount that they saved to fund the

projects that they need to fund. Yes, exactly, so best case scenario, a country is able to lower their a load o les to Wall Street of this very expensive debt, and at the same time that they're saving money, they're able to funnel some of those funds into environmental measures, which of course have become so important worldwide. But also on Wall Street we've seen similar investment ideas pop up, like green bonds. So this is just another part of

this environmental and social focused investing rainbow. So I can see why one of these countries would find a blue bond attractive. They lower their debt and they get found money. What is the incentive for a bank and for this environmental group, the Nature Conservancy to do this, what do

they get out of it? Well, for the Nuture Conservancy in particular, their US based charity focused on environmental protection conservation, and they've found this way to use money in in innovative ways to do this, so they're effectively able to further our mission, further their goals by working with governments to have very specific pathways for how the money will work.

It's also sort of nice because they're able to set it up where they're able to then step back and let the money and the program do its work for a long period of time. So I think for the banks, of course, everyone likes to be a part of something that is seen as on the right side of history, pushing from these environmental measures. But of course I think there's opportunity there if you're able to be involved in some kind of innovative financing plan like the blue bonds initiative,

I'm sure they're making money off of it. There would be little sense in becoming heavily involved in a program that is purely charitable without being a charitable organization. And banks, of course, are still trying to make money. So I'm sure that although we don't have great insight into the exact fee structures and the exact ways the banks are profiting off of some of these deals, it's a safe assumption to make that they are in fact making any

off of it. So when you think about the worldwide bond market, which is trillions and trillions of dollars, how much are blue bonds right now? How much of that? Does that represent? A very tiny portion. These deals have only been done a halful of times. Seychelles was the first, As you mentioned, there was a larger one done in Beliefe,

which is a fascinating story of its own. That government has had a bit of an infamous history in terms of its relationship with Wall Street and its ability or rather an ability to be able to pay its debt back over time. How does a financial institution that creates this investment make money off of it if they've made it less profitable, So that's the question. The fee structures

in debt deals are not always the most transparent. In a deal like this, especially a structure that's o new, so novel, it's hard to really dig in and see exactly how the cut of the proceeds is trickling out. Now that we've seen a few of these deals, I think there's going to be more focus on who is making money here, But of course a bank is a business and they have to make money. So as nice and as good as some of these environmental pushes are, they are also doing it for a profit. And that's

something to keep in mind. Is every person involved in a deal like this has a motive, and they can be two fold. They can be a motive toward having a greener, more sustainable future, but also folks want to get paid. So that's a good point. I mean, am I cynical to think that maybe a small country that has a lot of debt and is turning to big financial institution might not be getting the best deal here. I think it totally depends on the country and the situation.

You might have an example like Beliefs where they have had trouble repaying their for years and years. Their debt has already been restructured, so essentially they've had to go back to their creditors on Walla Street and beyond and say we can't pay. Let's come up with a deal to you know, hopefully lower the amount we owe or come up with a new payment schedule, and it hasn't worked.

So for a country like Beliefs trying to find an alternative like this blue bond exchange program where they can go down a new avenue and try something different, that is an opportunity and it might not necessarily matter what the fees are, what the structure is, if it's a better option than what they've been trying to do. And we're going to hear more about Beliezes experience with blue

bonds in just a little bit Sydney. Typically, a country that finds itself into situation like this might go to UH the International Monetary Fund, an organization that helps countries in this sort of situation, Why don't they go there instead of turning to the sure currentservancy and financial institutions for these blue bonds. That's a really good question, and I think again it depends on the government, who the

leadership is and what their goals are. Working with one of these large multilateral lenders like the i m F can be a good option, but it often comes with different caveats that a government has to keep in mind. The i m F might ask a government to go through different economic or political reforms, things that the i m F sees as really important for long term sustainability

for the country. But also they could come with measures that are painful, austerity measures that are tough to stomach for a country, especially one where people are already suffering under the weight of high inflation, higher prices, or other economic challenges. So under those terms, governments have to agree to a lot of different conditions. Are their conditions put on blue bonds? But I say the nature conservancy where

they have to meet certain targets. Yeah, So in that way, it's it's a little bit similar, except instead of having these targets be focused primarily on economic initiatives, the blue bond program is focused on ocean and marine conservation. So I think for most of the deals that we've seen so far, the goal is for about thirty marine conservation over a period of time. So that could include a lot of different things, potentially passing legislation that formally designates

protected areas. It could be changing phishing laws or implementing different programs to crack down on illegal fishing or other illegal operations that can harm the environment. So it's a different goal set, but with the blue bond scenario, it's one that is very much focused on trying to make the oceans a cleaner, safer and protected place. Sydney Maggie, thanks so much for speaking with me today. It was a pleasure. Thank you. After the break, we'll see what

a blue band deal looks like in real life. We've been hearing about how these blue bands, these debt for nature swaps, how these deals work. Now let's see what they look like in real life. My colleague Natasha White covers environmental investing and she's written a story about a blue band deal and belies it's one of the first. Natasha, thanks for coming on the show. Hi, thanks very much for having me. Tell us first, just a little bit about Belies and why they wanted to get into blue bands.

I guess if we if we go back to late the country, which is highly dependent on tourism as a main source of revenue, was was really struggling as the COVID nineteen pandemic had had shut that off. People were no longer able to visit the country, and that sort of revenue had kind of dried up. And what it meant was the country really struggling to pay back what it had borrowed. So it had what's called a euro bond in the market and it was looking unlikely that

the country was going to pay that back. So it was it wasn't doing well in the market and it was eating up its foreign currency. There was an option on the table. It was an IMF deal. The i m F is a typical kind of lender of last resort for countries that are struggling with unsustainable debt burdens. But I m F programs typically come with conditions, and

those types of conditions often make government's bulk. And so Beliez was already struggling because they've lost so much income from the loss of tourism, and so those conditions were going to be a bitter pill the swallow if they went along with them. Yeah, so Belize has been kind of labeled a serial that defaultered. This wasn't the first time that they were struggling with their debt, and the option on the table for them was an IMF program, but that came with these conditions and these kind of

austerity conditions which the government effectively found unpalatable. But they also then had the second offer on the table, which was the h Conservants here, you know, US based conservation organization that has a long history and Belize, and that had done a kind of what's called a debt for nature swap in the stay Shells a few years earlier, a much smaller deal, but nonetheless kind of piloted one of these deals which have been around since the eighties,

but in a kind of new form. And so they approached Beliefe and the Belize government were excited by the prospect that, you know, they could pursue this avenue of restructuring their debt without the kinds of conditions that would have been imposed on them by the I m F. And what did the Nature Conservancy approach and with what were the details of the deal in the kind of

bigger picture sense. What the Nature Conservancy proposed what's called a debt for nature swap, and that is a restructuring of the debts and in return, some of the money freed up from that restructuring would be allocated to nature conservation projects. So in this instance, Belize had a five fifty three million dollar bond in the market that, as I said, wasn't doing well, and the Nature Conservancy came in and said, you know, we can help you negotiate.

We will lend you money to back this bond, and in return you need to allocate some of that money towards specific marine conservation projects. Now, how exactly does this work and the financial side, because the Nature Conservancy is an environmental group, it's not a bank and a lending institution, so who put up the money? Effectively, it's a kind of tears crediting structure. So Belieze had to first buy back this three million dollar euro bond from the market.

It negotiated you to a discount, but nonetheless had to find the money to do that. So the Nature Conservancy set up a subsidiary and that subsidiary lent believes the money to buy back the eurobond. The Nature Conservancy is

a conservation NGA, it's not a bank. So they in turn raised the money from credit suites or a special purpose vehicle set up by credit suites and Credit Suite and turn raised that money from the market, so from institution investors, pension funds and credit suites did so in the form of issuing bonds, and these have been called blue bonds in the sense that they are connected to Beliezes marine conservation projects that are an outcome of this deal.

So this tiered money for structure, where at the top of the chain you've got institutional investors which have lent money to Credit Sweeze, which has lent money to the Nature Conservancy, which has lent money to Belieze, which it has used to buy back this ailing europe one from the markets. So I can imagine the heads of a lot of our listeners are spinning with the details. I gotta say my head is spinning a little bit too.

This is a really complicated structure. So is the Nature Conservancy sort of the broker here between bellies and credit suites the money behind this, and that it's the good name of the Nature Conservancy that persuades people that this

is a good investment. To make debt for nature swaps have been around since the nineteen eighties, but what I think is new in this round of recent swaps, of which believes is the biggest, which the Nature Conservancy has spearheaded, is the involvement of, for example, in an investment bank, credit swees, and that credit speece is able to raise money to fund these deals from the market, so from institutional investors, and that's a huge source of funds that

have previously been largely untapped, and someone's termed them kind of turbo charged that for nature swaps in the sense that there's now this unlimited, effectively unlimited pool of institutional funds flowing, whereas in the past it was more kind of deals done with bilateral enders, so governments that have limited funds. So the band that the les head out was not doing well, they bought it back Credit Sweees then, in partnership with the Nature Conservancy, cut their dead and

reissued it for others to buy. Why is it that people are willing to buy this version of it when they weren't willing to buy the previous version. Critically important to this deal was a kind of insurance policy from the US International Development Finance corporation, which effectively de risked the deal for invest stars and effectively put the U. S Government on the hook if Belize failed to pay.

So people invest in it. They can feel good about it because they see that this is going towards cleaning up coral we reefs and other other things like that, and they don't have any risk that Believes, which you

describe as a serial defaulter, will default again. Right. So yeah, I suppoke to one of the pension funds invested in the blue bonds and they were excited by them because they know they were low risks, compared them to effectively U. S. Treasuries in the sense they've got US government well something similar to a US government guarantee. And at the same time they are linked to marine conservation, so they have a kind of E. S G label on them. Up next,

what are the future of blue bands? So they made this deal? How's it going? How did it work out? It cut believe is debt by twelve percent of g d P. It reopened its access to financial markets, and it redirected money that was once destined for foreign creditors into the local economy. And at the same time Belize promised too final millions to protect its oceans and nature. I think regarding the long term impacts, only time will tell.

Believes that remains unsustainable. So while it helped cut Beliezes debt burden, it hasn't put the country back on a fully sustainable path. And while the new terms of the deal offer a lower interest rate than the europe one that was in the market, and on a lower amount, that interest steps back up over the next few years. They've got a bit of breathing room, but they'll know

that interest does step back up. And yeah, in December, the first ones will dispersed to some of the marine conservation projects, but again it remains to see how those will be managed and implemented over time. That is an unknown. It sounds like a pretty good deal they were able to get from underneath a dead burden, as you describe it. But was this the best deal that Beliefs could have gotten?

Was this a good deal for them? Right? So believes our adamant that they have secured the best deal they could. But I've spoken to a number of debt experts who have looked at the conditions of the deal and have concluded that it's extremely expensive for what it is? What do you mean by that? One key element as I

as I described the credit structure. So credit spees lends money to the Nature Conservancy, which lends money to Believe, and those interest rates on those those loan structures are different. So credit Spies is borrowing money and the Nature Conservancy is borrowing money at a different rate to which Believes is borrowing money a lower rate. They are borrowing at

a lower rate than they are offering Beliez. And so we've taken a closer look at that what's called spread the difference in the interest rates, and questioned it, why aren't those lower borrowing costs being passed down to belieze? And the response from credits recent from the Nature Conservancy is that the lower borrowing costs have been passed down and actually the reason for the difference in our interest rate is actually a number that it covers a number

of costs. And so critics are saying, why are we just finding out about the is costs now? Why weren't those costs fully disclosed in the first place. This is public money that we're talking about, both from beliefs but also from the u s. Taxpayers are guaranteing the offering the insurance policy and everything needs to be fully transparent. And it's both important for beliefs, but it's also important for other countries that are looking to negotiate these deals

in the future. They should know what it is that they're upper gates when there negotiating with these organizations and these investment banks to put these deals in place. And do you think that these dead for nature swabs in particular blue bands are going to become more popular, that will start to see more of these deals in the future. Yeah, so I think three will be a big year for Death for Nature swaps. These deals are attracting a lot

of interest. Gabon signal plans for a seven hundred million dollar restructuring in October, Ecuadora said to be working on an eight hundred million dollar transaction, and Sri Lanka is considering a one billion dollar deal. So we're seeing both increasing levels of interests as well as an increasing size of the transit action on the negotiation. Natasha White, thanks so much for talking to me today. Thanks very much

for having me. You could read more about blue bonds from Natasha White and Sydney Mackie at Bloomberg dot com. Thanks for listening to us here at The Big Take, the daily podcast from Bloomberg and I Heart Radio. For more shows from my heart Radio, visit the heart Radio app, Apple Podcasts, or wherever you listen. Read Today story and subscribe to our daily newsletter at Bloomberg dot com slash Big Take, and we'd love to hear from you. Email us with questions or comments to Big Take at Bloomberg

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