Speaker 1: It's a big take from Bloomberg News and iHeart Radio.
Speaker 1: I'm west Coasova today helping countries get rid of debt
Speaker 1: in exchange for cleaning up the water. A few weeks
Speaker 1: ago on the podcast, we talked about green bonds. That's
Speaker 1: this increasingly popular investment where you help a government or
Speaker 1: company fund an environmentally friendly initiative like a solar project,
Speaker 1: and you get your money back with interest. Like any
Speaker 1: other kind of bond you might buy. Green bonds are
Speaker 1: upwards of a trillion dollar market. Now today we're talking
Speaker 1: about a different kind of eco friendly deal that's starting
Speaker 1: to take off. It's called a blue bond, as in
Speaker 1: blue like water. The U S environmental group, the Nature
Speaker 1: can Servancy, has teamed up with banks to offer certain
Speaker 1: countries a deal. They'll help them get out from under
Speaker 1: crippling debt if they agree to tackle polluted coral reefs
Speaker 1: and other dirty water systems. These kind of agreements are
Speaker 1: also called debt for nature swaps, and they've been around
Speaker 1: for decades. The Nature Conservancy's Blue bond model, which focuses
Speaker 1: on water, is just one way to do it. So far,
Speaker 1: a handful of countries have signed up, including the Sayshells
Speaker 1: Barbados and belize they are really complicated deals and it's
Speaker 1: not always clear who benefits the most. My colleague Sydney
Speaker 1: Mackie in New York has been digging into them, and
Speaker 1: she joins me now to tell us how it works. Sydney,
Speaker 1: thanks for being here. Happy to be here. Blue bunds
Speaker 1: can be a little bit intimidating to try to understand.
Speaker 1: Can you give us a simple explanation of what they are? Yeah. So,
Speaker 1: oftentimes when a government is trying to find ways to
Speaker 1: raise money very quickly in order to prop up their
Speaker 1: economy run projects that are important to the nation, they
Speaker 1: will turn to Wall Street in order to do that,
Speaker 1: and they'll essentially sell bonds and raise debt in order
Speaker 1: to very quickly get US dollars. But that tends to
Speaker 1: be pretty expensive, and so after a while, if a
Speaker 1: very large sum of debt has piled up, just like
Speaker 1: you or me and our credit card bills, it can
Speaker 1: get unwieldy, and so a government will sometimes try to
Speaker 1: find some kind of alternative solution to pay back its
Speaker 1: debt if it's too much um and that's where blue
Speaker 1: bonds come in. So for certain countries, especially those that
Speaker 1: have really high debt loads but also are located along
Speaker 1: the coast or have very ocean dependent economies that run
Speaker 1: on tourism or fishing. That's where we're seeing opportunities for
Speaker 1: these new investment vehicles called blue bonds, and essentially for
Speaker 1: these governments, they're opportunity to take some of this very
Speaker 1: expensive debt that they've borrowed from Wall Street and swap
Speaker 1: it for what is theoretically a more affordable loan through
Speaker 1: a US based charity called the Nature Conservancy, which is
Speaker 1: working with a headful of other banks, including Credits SWEEZ
Speaker 1: and the upshot of all of this is essentially that
Speaker 1: the savings between the more expensive debt and this new
Speaker 1: or less expensive quote unquote blue debt will be used
Speaker 1: to fund certain nature saving measures, so ocean conservation, new
Speaker 1: phishing laws, things that theoretically will help to offset pollution
Speaker 1: and climate change in those ocean based economies. So essentially,
Speaker 1: what they're sort of doing is refinancing their debt and
Speaker 1: then keeping the amount that they saved to fund the
Speaker 1: projects that they need to fund. Yes, exactly, so best
Speaker 1: case scenario, a country is able to lower their a
Speaker 1: load o les to Wall Street of this very expensive debt,
Speaker 1: and at the same time that they're saving money, they're
Speaker 1: able to funnel some of those funds into environmental measures,
Speaker 1: which of course have become so important worldwide. But also
Speaker 1: on Wall Street we've seen similar investment ideas pop up,
Speaker 1: like green bonds. So this is just another part of
Speaker 1: this environmental and social focused investing rainbow. So I can
Speaker 1: see why one of these countries would find a blue
Speaker 1: bond attractive. They lower their debt and they get found money.
Speaker 1: What is the incentive for a bank and for this
Speaker 1: environmental group, the Nature Conservancy to do this, what do
Speaker 1: they get out of it? Well, for the Nuture Conservancy
Speaker 1: in particular, their US based charity focused on environmental protection conservation,
Speaker 1: and they've found this way to use money in in
Speaker 1: innovative ways to do this, so they're effectively able to
Speaker 1: further our mission, further their goals by working with governments
Speaker 1: to have very specific pathways for how the money will work.
Speaker 1: It's also sort of nice because they're able to set
Speaker 1: it up where they're able to then step back and
Speaker 1: let the money and the program do its work for
Speaker 1: a long period of time. So I think for the banks,
Speaker 1: of course, everyone likes to be a part of something
Speaker 1: that is seen as on the right side of history,
Speaker 1: pushing from these environmental measures. But of course I think
Speaker 1: there's opportunity there if you're able to be involved in
Speaker 1: some kind of innovative financing plan like the blue bonds initiative,
Speaker 1: I'm sure they're making money off of it. There would
Speaker 1: be little sense in becoming heavily involved in a program
Speaker 1: that is purely charitable without being a charitable organization. And banks,
Speaker 1: of course, are still trying to make money. So I'm
Speaker 1: sure that although we don't have great insight into the
Speaker 1: exact fee structures and the exact ways the banks are
Speaker 1: profiting off of some of these deals, it's a safe
Speaker 1: assumption to make that they are in fact making any
Speaker 1: off of it. So when you think about the worldwide
Speaker 1: bond market, which is trillions and trillions of dollars, how
Speaker 1: much are blue bonds right now? How much of that?
Speaker 1: Does that represent? A very tiny portion. These deals have
Speaker 1: only been done a halful of times. Seychelles was the first,
Speaker 1: As you mentioned, there was a larger one done in Beliefe,
Speaker 1: which is a fascinating story of its own. That government
Speaker 1: has had a bit of an infamous history in terms
Speaker 1: of its relationship with Wall Street and its ability or
Speaker 1: rather an ability to be able to pay its debt
Speaker 1: back over time. How does a financial institution that creates
Speaker 1: this investment make money off of it if they've made
Speaker 1: it less profitable, So that's the question. The fee structures
Speaker 1: in debt deals are not always the most transparent. In
Speaker 1: a deal like this, especially a structure that's o new,
Speaker 1: so novel, it's hard to really dig in and see
Speaker 1: exactly how the cut of the proceeds is trickling out.
Speaker 1: Now that we've seen a few of these deals, I
Speaker 1: think there's going to be more focus on who is
Speaker 1: making money here, But of course a bank is a
Speaker 1: business and they have to make money. So as nice
Speaker 1: and as good as some of these environmental pushes are,
Speaker 1: they are also doing it for a profit. And that's
Speaker 1: something to keep in mind. Is every person involved in
Speaker 1: a deal like this has a motive, and they can
Speaker 1: be two fold. They can be a motive toward having
Speaker 1: a greener, more sustainable future, but also folks want to
Speaker 1: get paid. So that's a good point. I mean, am
Speaker 1: I cynical to think that maybe a small country that
Speaker 1: has a lot of debt and is turning to big
Speaker 1: financial institution might not be getting the best deal here.
Speaker 1: I think it totally depends on the country and the situation.
Speaker 1: You might have an example like Beliefs where they have
Speaker 1: had trouble repaying their for years and years. Their debt
Speaker 1: has already been restructured, so essentially they've had to go
Speaker 1: back to their creditors on Walla Street and beyond and
Speaker 1: say we can't pay. Let's come up with a deal
Speaker 1: to you know, hopefully lower the amount we owe or
Speaker 1: come up with a new payment schedule, and it hasn't worked.
Speaker 1: So for a country like Beliefs trying to find an
Speaker 1: alternative like this blue bond exchange program where they can
Speaker 1: go down a new avenue and try something different, that
Speaker 1: is an opportunity and it might not necessarily matter what
Speaker 1: the fees are, what the structure is, if it's a
Speaker 1: better option than what they've been trying to do. And
Speaker 1: we're going to hear more about Beliezes experience with blue
Speaker 1: bonds in just a little bit Sydney. Typically, a country
Speaker 1: that finds itself into situation like this might go to
Speaker 1: UH the International Monetary Fund, an organization that helps countries
Speaker 1: in this sort of situation, Why don't they go there
Speaker 1: instead of turning to the sure currentservancy and financial institutions
Speaker 1: for these blue bonds. That's a really good question, and
Speaker 1: I think again it depends on the government, who the
Speaker 1: leadership is and what their goals are. Working with one
Speaker 1: of these large multilateral lenders like the i m F
Speaker 1: can be a good option, but it often comes with
Speaker 1: different caveats that a government has to keep in mind.
Speaker 1: The i m F might ask a government to go
Speaker 1: through different economic or political reforms, things that the i
Speaker 1: m F sees as really important for long term sustainability
Speaker 1: for the country. But also they could come with measures
Speaker 1: that are painful, austerity measures that are tough to stomach
Speaker 1: for a country, especially one where people are already suffering
Speaker 1: under the weight of high inflation, higher prices, or other
Speaker 1: economic challenges. So under those terms, governments have to agree
Speaker 1: to a lot of different conditions. Are their conditions put
Speaker 1: on blue bonds? But I say the nature conservancy where
Speaker 1: they have to meet certain targets. Yeah, So in that way,
Speaker 1: it's it's a little bit similar, except instead of having
Speaker 1: these targets be focused primarily on economic initiatives, the blue
Speaker 1: bond program is focused on ocean and marine conservation. So
Speaker 1: I think for most of the deals that we've seen
Speaker 1: so far, the goal is for about thirty marine conservation
Speaker 1: over a period of time. So that could include a
Speaker 1: lot of different things, potentially passing legislation that formally designates
Speaker 1: protected areas. It could be changing phishing laws or implementing
Speaker 1: different programs to crack down on illegal fishing or other
Speaker 1: illegal operations that can harm the environment. So it's a
Speaker 1: different goal set, but with the blue bond scenario, it's
Speaker 1: one that is very much focused on trying to make
Speaker 1: the oceans a cleaner, safer and protected place. Sydney Maggie,
Speaker 1: thanks so much for speaking with me today. It was
Speaker 1: a pleasure. Thank you. After the break, we'll see what
Speaker 1: a blue band deal looks like in real life. We've
Speaker 1: been hearing about how these blue bands, these debt for
Speaker 1: nature swaps, how these deals work. Now let's see what
Speaker 1: they look like in real life. My colleague Natasha White
Speaker 1: covers environmental investing and she's written a story about a
Speaker 1: blue band deal and belies it's one of the first. Natasha,
Speaker 1: thanks for coming on the show. Hi, thanks very much
Speaker 1: for having me. Tell us first, just a little bit
Speaker 1: about Belies and why they wanted to get into blue bands.
Speaker 1: I guess if we if we go back to late
Speaker 1: the country, which is highly dependent on tourism as a
Speaker 1: main source of revenue, was was really struggling as the
Speaker 1: COVID nineteen pandemic had had shut that off. People were
Speaker 1: no longer able to visit the country, and that sort
Speaker 1: of revenue had kind of dried up. And what it
Speaker 1: meant was the country really struggling to pay back what
Speaker 1: it had borrowed. So it had what's called a euro
Speaker 1: bond in the market and it was looking unlikely that
Speaker 1: the country was going to pay that back. So it
Speaker 1: was it wasn't doing well in the market and it
Speaker 1: was eating up its foreign currency. There was an option
Speaker 1: on the table. It was an IMF deal. The i
Speaker 1: m F is a typical kind of lender of last
Speaker 1: resort for countries that are struggling with unsustainable debt burdens.
Speaker 1: But I m F programs typically come with conditions, and
Speaker 1: those types of conditions often make government's bulk. And so
Speaker 1: Beliez was already struggling because they've lost so much income
Speaker 1: from the loss of tourism, and so those conditions were
Speaker 1: going to be a bitter pill the swallow if they
Speaker 1: went along with them. Yeah, so Belize has been kind
Speaker 1: of labeled a serial that defaultered. This wasn't the first
Speaker 1: time that they were struggling with their debt, and the
Speaker 1: option on the table for them was an IMF program,
Speaker 1: but that came with these conditions and these kind of
Speaker 1: austerity conditions which the government effectively found unpalatable. But they
Speaker 1: also then had the second offer on the table, which
Speaker 1: was the h Conservants here, you know, US based conservation
Speaker 1: organization that has a long history and Belize, and that
Speaker 1: had done a kind of what's called a debt for
Speaker 1: nature swap in the stay Shells a few years earlier,
Speaker 1: a much smaller deal, but nonetheless kind of piloted one
Speaker 1: of these deals which have been around since the eighties,
Speaker 1: but in a kind of new form. And so they
Speaker 1: approached Beliefe and the Belize government were excited by the
Speaker 1: prospect that, you know, they could pursue this avenue of
Speaker 1: restructuring their debt without the kinds of conditions that would
Speaker 1: have been imposed on them by the I m F.
Speaker 1: And what did the Nature Conservancy approach and with what
Speaker 1: were the details of the deal in the kind of
Speaker 1: bigger picture sense. What the Nature Conservancy proposed what's called
Speaker 1: a debt for nature swap, and that is a restructuring
Speaker 1: of the debts and in return, some of the money
Speaker 1: freed up from that restructuring would be allocated to nature
Speaker 1: conservation projects. So in this instance, Belize had a five
Speaker 1: fifty three million dollar bond in the market that, as
Speaker 1: I said, wasn't doing well, and the Nature Conservancy came
Speaker 1: in and said, you know, we can help you negotiate.
Speaker 1: We will lend you money to back this bond, and
Speaker 1: in return you need to allocate some of that money
Speaker 1: towards specific marine conservation projects. Now, how exactly does this
Speaker 1: work and the financial side, because the Nature Conservancy is
Speaker 1: an environmental group, it's not a bank and a lending institution,
Speaker 1: so who put up the money? Effectively, it's a kind
Speaker 1: of tears crediting structure. So Belieze had to first buy
Speaker 1: back this three million dollar euro bond from the market.
Speaker 1: It negotiated you to a discount, but nonetheless had to
Speaker 1: find the money to do that. So the Nature Conservancy
Speaker 1: set up a subsidiary and that subsidiary lent believes the
Speaker 1: money to buy back the eurobond. The Nature Conservancy is
Speaker 1: a conservation NGA, it's not a bank. So they in
Speaker 1: turn raised the money from credit suites or a special
Speaker 1: purpose vehicle set up by credit suites and Credit Suite
Speaker 1: and turn raised that money from the market, so from
Speaker 1: institution investors, pension funds and credit suites did so in
Speaker 1: the form of issuing bonds, and these have been called
Speaker 1: blue bonds in the sense that they are connected to
Speaker 1: Beliezes marine conservation projects that are an outcome of this deal.
Speaker 1: So this tiered money for structure, where at the top
Speaker 1: of the chain you've got institutional investors which have lent
Speaker 1: money to Credit Sweeze, which has lent money to the
Speaker 1: Nature Conservancy, which has lent money to Belieze, which it
Speaker 1: has used to buy back this ailing europe one from
Speaker 1: the markets. So I can imagine the heads of a
Speaker 1: lot of our listeners are spinning with the details. I
Speaker 1: gotta say my head is spinning a little bit too.
Speaker 1: This is a really complicated structure. So is the Nature
Speaker 1: Conservancy sort of the broker here between bellies and credit
Speaker 1: suites the money behind this, and that it's the good
Speaker 1: name of the Nature Conservancy that persuades people that this
Speaker 1: is a good investment. To make debt for nature swaps
Speaker 1: have been around since the nineteen eighties, but what I
Speaker 1: think is new in this round of recent swaps, of
Speaker 1: which believes is the biggest, which the Nature Conservancy has spearheaded,
Speaker 1: is the involvement of, for example, in an investment bank,
Speaker 1: credit swees, and that credit speece is able to raise
Speaker 1: money to fund these deals from the market, so from
Speaker 1: institutional investors, and that's a huge source of funds that
Speaker 1: have previously been largely untapped, and someone's termed them kind
Speaker 1: of turbo charged that for nature swaps in the sense
Speaker 1: that there's now this unlimited, effectively unlimited pool of institutional
Speaker 1: funds flowing, whereas in the past it was more kind
Speaker 1: of deals done with bilateral enders, so governments that have
Speaker 1: limited funds. So the band that the les head out
Speaker 1: was not doing well, they bought it back Credit Sweees then,
Speaker 1: in partnership with the Nature Conservancy, cut their dead and
Speaker 1: reissued it for others to buy. Why is it that
Speaker 1: people are willing to buy this version of it when
Speaker 1: they weren't willing to buy the previous version. Critically important
Speaker 1: to this deal was a kind of insurance policy from
Speaker 1: the US International Development Finance corporation, which effectively de risked
Speaker 1: the deal for invest stars and effectively put the U.
Speaker 1: S Government on the hook if Belize failed to pay.
Speaker 1: So people invest in it. They can feel good about
Speaker 1: it because they see that this is going towards cleaning
Speaker 1: up coral we reefs and other other things like that,
Speaker 1: and they don't have any risk that Believes, which you
Speaker 1: describe as a serial defaulter, will default again. Right. So yeah,
Speaker 1: I suppoke to one of the pension funds invested in
Speaker 1: the blue bonds and they were excited by them because
Speaker 1: they know they were low risks, compared them to effectively U. S.
Speaker 1: Treasuries in the sense they've got US government well something
Speaker 1: similar to a US government guarantee. And at the same
Speaker 1: time they are linked to marine conservation, so they have
Speaker 1: a kind of E. S G label on them. Up next,
Speaker 1: what are the future of blue bands? So they made
Speaker 1: this deal? How's it going? How did it work out?
Speaker 1: It cut believe is debt by twelve percent of g
Speaker 1: d P. It reopened its access to financial markets, and
Speaker 1: it redirected money that was once destined for foreign creditors
Speaker 1: into the local economy. And at the same time Belize
Speaker 1: promised too final millions to protect its oceans and nature.
Speaker 1: I think regarding the long term impacts, only time will tell.
Speaker 1: Believes that remains unsustainable. So while it helped cut Beliezes
Speaker 1: debt burden, it hasn't put the country back on a
Speaker 1: fully sustainable path. And while the new terms of the
Speaker 1: deal offer a lower interest rate than the europe one
Speaker 1: that was in the market, and on a lower amount,
Speaker 1: that interest steps back up over the next few years.
Speaker 1: They've got a bit of breathing room, but they'll know
Speaker 1: that interest does step back up. And yeah, in December,
Speaker 1: the first ones will dispersed to some of the marine
Speaker 1: conservation projects, but again it remains to see how those
Speaker 1: will be managed and implemented over time. That is an unknown.
Speaker 1: It sounds like a pretty good deal they were able
Speaker 1: to get from underneath a dead burden, as you describe it.
Speaker 1: But was this the best deal that Beliefs could have gotten?
Speaker 1: Was this a good deal for them? Right? So believes
Speaker 1: our adamant that they have secured the best deal they could.
Speaker 1: But I've spoken to a number of debt experts who
Speaker 1: have looked at the conditions of the deal and have
Speaker 1: concluded that it's extremely expensive for what it is? What
Speaker 1: do you mean by that? One key element as I
Speaker 1: as I described the credit structure. So credit spees lends
Speaker 1: money to the Nature Conservancy, which lends money to Believe,
Speaker 1: and those interest rates on those those loan structures are different.
Speaker 1: So credit Spies is borrowing money and the Nature Conservancy
Speaker 1: is borrowing money at a different rate to which Believes
Speaker 1: is borrowing money a lower rate. They are borrowing at
Speaker 1: a lower rate than they are offering Beliez. And so
Speaker 1: we've taken a closer look at that what's called spread
Speaker 1: the difference in the interest rates, and questioned it, why
Speaker 1: aren't those lower borrowing costs being passed down to belieze?
Speaker 1: And the response from credits recent from the Nature Conservancy
Speaker 1: is that the lower borrowing costs have been passed down
Speaker 1: and actually the reason for the difference in our interest
Speaker 1: rate is actually a number that it covers a number
Speaker 1: of costs. And so critics are saying, why are we
Speaker 1: just finding out about the is costs now? Why weren't
Speaker 1: those costs fully disclosed in the first place. This is
Speaker 1: public money that we're talking about, both from beliefs but
Speaker 1: also from the u s. Taxpayers are guaranteing the offering
Speaker 1: the insurance policy and everything needs to be fully transparent.
Speaker 1: And it's both important for beliefs, but it's also important
Speaker 1: for other countries that are looking to negotiate these deals
Speaker 1: in the future. They should know what it is that
Speaker 1: they're upper gates when there negotiating with these organizations and
Speaker 1: these investment banks to put these deals in place. And
Speaker 1: do you think that these dead for nature swabs in
Speaker 1: particular blue bands are going to become more popular, that
Speaker 1: will start to see more of these deals in the future. Yeah,
Speaker 1: so I think three will be a big year for
Speaker 1: Death for Nature swaps. These deals are attracting a lot
Speaker 1: of interest. Gabon signal plans for a seven hundred million
Speaker 1: dollar restructuring in October, Ecuadora said to be working on
Speaker 1: an eight hundred million dollar transaction, and Sri Lanka is
Speaker 1: considering a one billion dollar deal. So we're seeing both
Speaker 1: increasing levels of interests as well as an increasing size
Speaker 1: of the transit action on the negotiation. Natasha White, thanks
Speaker 1: so much for talking to me today. Thanks very much
Speaker 1: for having me. You could read more about blue bonds
Speaker 1: from Natasha White and Sydney Mackie at Bloomberg dot com.
Speaker 1: Thanks for listening to us here at The Big Take,
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