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Belize is inching towards a deal with international bondholders after admitting it cannot afford to pay back its debt, and counting on an unusual asset to help: its coral reefs.
Earlier this month the Caribbean nation, with its tourism-heavy economy ravaged by the pandemic, agreed to buy back its only international bond from investors at a huge discount, using cash lent by the Nature Conservancy, a US-based environmental group. As part of the deal, Belize will pre-fund a $23.4m endowment to support marine conservation projects on its coastline, home to the world’s second-largest barrier reef.
Some more investors still need to agree to the scale of the buyback discount before the deal is done. But if Belize can achieve the approval it needs on this $530m bond, the country could secure the first green-tinged debt restructuring, capitalising on the hunger among big fund managers to demonstrate their commitment to environmental, social and governance-driven investing.
Investors and advisers say the agreement could serve as a template for future restructuring talks, in which cash-strapped nations use the promise of environmental conservation to drive a harder bargain — in effect creating a mechanism for investors in rich countries to pay poorer nations to protect the natural world.
“We live in a world where many institutional investors profess ESG sensibilities,” said Lee Buchheit, the veteran sovereign debt restructuring lawyer who is advising the Belizean government. “In any restructuring things always get tight when you get down to the last few pennies. We were hoping the environmental aspect would sweeten the transaction.”
The buyback operation, which is offering investors 55 cents for every dollar of debt they hold, needs the support of a further quarter of bondholders in order to go through.
But a group of investors led by GMO, Abrdn and Greylock Capital, representing half of the bondholders, has already given the scheme its blessing. Carlos de Sousa, a portfolio manager at Vontobel Asset Management — a member of this group holding about 10 per cent of the bond — said the proposal chimes with his company’s focus on ESG.
“Even though 55 is not the most amazing recovery value, we like the deal,” he said, adding that investors had got more of their money back in previous restructurings. “To think that we are contributing to saving the second-biggest coral reef in the world is certainly a positive. It makes you somewhat less inclined to push for 60.”
Cecely Hugh, investment counsel at Abrdn, said the marine endowment “definitely makes the offer more attractive”.
For Belize, whose debt stands at 133 per cent of gross domestic product despite restructuring its borrowing five times over the past 15 years, the deal offers the chance to mend its reputation as a serial defaulter.
Ocean conservation is crucial to the country’s economy, with 40 per cent of output coming directly or indirectly from tourism, and one in every 10 workers employed in the fishing sector.
Conventional debt restructuring processes leave any savings to be spent — or misspent — as the debtor government sees fit, said Belizean prime minister John Briceño, often leading to a cycle of “overborrowing followed by a disagreeable purging through a debt restructuring, followed by another borrowing binge and yet another purging”.
In this case, he said, “Belize’s pending offer attempts to break this cycle by channelling a portion of the debt relief into an investment in the Belizean economy that will result in benefits to Belize and to the planet”.
Belize’s deal is not the first time ESG has cropped up in restructuring talks. Last year, a group of investors pushed for the inclusion of ESG criteria in Ecuador’s debt swap, which would potentially have led to payouts on the country’s new bonds being linked to its ability to hit environmental targets aligned with the Paris climate agreement. Some holders of bonds issued by the Argentine province of Buenos Aires also pushed for an ESG-friendly restructuring earlier this year.
Although neither attempt bore fruit, Belize’s advisers took note. “That sentiment is precisely what we were targeting,” said Buchheit.
Fund managers say restructuring talks provide a unique opportunity to raise their ESG concerns with governments, which are typically less susceptible to investor pressure than companies. “Engagement has always been a very tricky area with sovereigns compared to corporates,” said Yerlan Syzdykov, global head of emerging markets at Amundi, which was involved in the restructurings in both Ecuador and Buenos Aires. “But if you are already involved in a negotiation, you can try to discuss the direction of development with regards to sustainability goals.”
Not all investors are on board with such schemes. Hedge funds, for example, are typically concerned with “maximising recovery value over anything else”, Syzdykov said. Even so, he expects ESG to feature increasingly in debt negotiations. “The grand idea here is rich countries — or investors representing mostly rich countries — should be able to help poorer countries pay for the transition,” Syzdykov said.
In 2013 Ecuador abandoned plans to persuade rich countries to pay it not to drill for oil in the rainforest after the scheme hatched by former president Rafael Correa pulled in just $13m.
Debt restructuring talks potentially offer a new mechanism to achieve a similar goal, argues Vontobel’s de Sousa. Suriname, another Amazon nation on the cusp of becoming a major oil exporter, might be tempted to try something similar in its current negotiations with creditors, he said.
“The Belize deal offers an example of how sovereigns can monetise the protection of the environment,” de Sousa said.
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