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The deals, which are private, have faced criticism for their lack of standardization when it comes to reporting both fees and savings. Investors attracted to the market often focus on the environmental or social impact of their financial contribution.
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Marine de Bazelaire, former European head of sustainability at HSBC Holdings Plc, says borrower nations should be wary of engaging in debt swap deals that shift control of domestic priorities to overseas entities. “At the end of the day, we’re talking about the wealth and real assets of countries and their capacity to monitor what is core to their sovereignty,” she says.
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The commercial debt swap market, which has existed in its current form since 2021, more than doubled in size last year to roughly $4.7 billion. It could eventually help unlock as much as $100 billion in funds for nature and climate-related goals alone, according to a group of nonprofits working on a pipeline for developing nations.
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Harper at Legal & General, which has invested close to $500 million in debt-for-nature swaps, says the new deals expected to complete later this year are linked to non-nature United Nations Sustainable Development Goals that span affordable energy to poverty reduction.
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The Inter-American Development Bank, which has been involved in many of the debt swaps to date, is now seeing demand for structures that allow savings to be channeled into education and health, according to Ilan Goldfajn, the bank’s president.
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Ramzi Issa, co-founder of credit fund Enosis Capital, says the financial profile of debt swaps makes them particularly suited to environmental projects. Issa, who led the team of bankers at Credit Suisse that pioneered the swap structure and was involved with the first such transaction back in 2021, says the instruments provide the kind of long-term, steady cash flow that’s required for conserving natural ecosystems.
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That’s in contrast to general infrastructure, which is something that can be done with standard project finance, he says. “Financing infrastructure has been around for a long time, whereas on the development side, having this constant stream of available investment in the project, it aligns very well,” Issa said.
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He also cautions that the kinds of investors traditionally drawn to debt-for-nature swaps may be less inclined to allocate capital to deals that don’t have clear sustainability goals.
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The “distinguishing factor” from other financings “is this policy and project component,” Issa says. “From the investor side, that’s what’s been driving demand.”
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Daniel Ballesta, executive director at Enosis, says swaps targeting new sectors will likely require even more time and resources.
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“It’s not just adapting the debt swap to a different sector,” says Ballesta, who used to work at The Nature Conservancy, a US nonprofit that played a key role in structuring early commercial debt swaps. “You also have to adapt that different sector to the debt swap model,” he says. “It can be complicated and it’s going to require some patient capital.”
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The Nature Conservancy has said that swaps in their original form can help plug an annual $200 billion gap to stem biodiversity loss.
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Harper at Legal & General says he doesn’t really see limits on the sectors or purposes to which debt swaps can be applied.
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“The concept should be freely adaptable,” he says, adding that ideally, the swaps should go to areas that are structurally under-funded.
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(Adds comment from Nature Conservancy in third-to-last paragraph.)
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