Bank of America Corp (BAC) refinanced Ecuador’s debt with a $1 billion operation aimed at financing the protection of forests, rivers, lakes, and wetlands in the Amazon. The debt-for-nature swap, the second agreement of its kind for both BofA and Ecuador, was conducted in collaboration with The Nature Conservancy (TNC). The deal is backed by a partial guarantee from the Inter-American Development Bank (IDB) and political risk insurance from the U.S. International Development Finance Corp.
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Sustainability and efficiency have become key priorities for modern businesses. With the increase in environmental regulations, companies face the challenge of reducing costs while adopting sustainable practices.
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Companies that integrate these strategies will be better prepared to tackle future challenges.
Ecuador’s Debt-for-Nature Swap
Ecuador’s debt-for-nature swap with Bank of America Corp provides significant benefits for both the country and the protection of the Amazon’s ecosystems. The swap allows Ecuador to refinance its obligations under more favorable conditions and allocate the savings to environmental objectives.
The agreement is expected to generate approximately $800 million in net fiscal savings for Ecuador by 2035. Over the next 17 years, $323 million will be dedicated to conservation efforts, including technical support from The Nature Conservancy (TNC). An annual endowment fund of $4.5 million will ensure the continuity of these efforts beyond the financing structure’s term. Ecuador aims for the endowment fund to reach $137 million by 2041.
How the Swap Works
Bank of America Corp organized a bond issuance to finance the debt-for-nature swap with Ecuador. The bonds attracted a wide range of investors, including hedge funds, insurance companies, and asset managers. The swap allowed Ecuador to repurchase approximately $1.5 billion of dollar-denominated bonds at a price range of 47.5 to 73 cents per dollar.
The bond tender offer was financed through a new $1 billion loan granted by Amazon Conservation DAC, an Irish special purpose vehicle. This loan was further financed through the issuance of $1 billion in new bonds due in 2042, with a coupon of 6.034%.
The U.S. International Development Finance Corp’s insurance and $155 million liquidity guarantee from the IDB contributed to reducing the loan’s cost for Ecuador. The new bonds are rated AA by Fitch Ratings and Aa2 by Moody’s Ratings, while Ecuador’s overall credit rating remains in junk territory according to Moody’s, S&P Global Ratings, and Fitch Ratings.
Conservation Funding and Governance
The majority of the new funds for conservation efforts will be distributed through a new trust fund called the Amazon Biocorridor Fund. This fund will be managed by a local board composed of representatives from the government, TNC, indigenous groups, and companies.
Ecuador has committed to protecting 30% of its lands and waters by the end of the decade, in accordance with the Kunming-Montreal Global Biodiversity Framework adopted in 2022. Currently, Ecuador has protected 24% of its inland lands and waters and 19% of its seas. The funds from the debt-for-nature swap will help expand protection areas and improve the management of existing ones.
Previous Debt-for-Nature Swaps and Criticisms
Ecuador had previously conducted a debt-for-nature swap, with both agreements allowing the country to cancel approximately $1.5 billion of outstanding debt and raise around $900 million for conservation efforts. These funds were originally intended for external debt service but are now retained and reinvested within the country, benefiting all parties involved.
However, these previous debt-for-nature swaps have faced criticisms regarding transparency and community consultation. To address these concerns, a unit of the IDB mediated and now oversees the agreement between Ecuador and the involved parties.
The new agreement aims to be as transparent and efficient as possible to encourage institutional investors’ participation in future debt-for-nature swaps.
Elaborating on the matter, Melissa Garvey, Global Director of Nature Bond at TNC, stated, «We have been working to make sure it is up and running and ready to go.»