Blue bonds are a relatively new form of debt instrument issued to support investments in healthy oceans and “blue economies”. In September 2022, Barbados announced a blue bond facility of US$150 million. The structure is co-guaranteed by the global environmental organization The Nature Conservancy (“TNC”) for US$50 million and the Inter-American Development Bank for the remaining US$100 million. This dual-currency blended finance deal was arranged jointly by CIBC FirstCaribbean and Credit Suisse and includes the following key features:
1. an extension of the debt profile to 2037
2. US$50 million toward marine conservation
3. capitalization of an endowment to fund marine conservation with the aim to protect 30% of Barbados’ ocean
4. inclusion of a climate clause in the case of a natural disaster, that would permit the deferral of debt payments for two years
5. a unique ‘pandemic clause’ to allow the government to defer debt payments (for up to two years at a time and twice if necessary), in the event of another global pandemic like COVID-19.
Barbados is not the first Caribbean country to issue a blue bond. In November 2021 Belize issued a blue bond which represented the world’s largest debt restructuring for marine conservation with a sum of US$553 million, reduction in total debt by US$250 million, and debt service savings of approximately US$200 million. This external commercial debt was refinanced and replaced with a $364 million loan financed by Credit Suisse and the US International Finance Development Corporation in conjunction with TNC. The key transaction components were similar to the Barbados blue loan with the exception of the pandemic clause.
While debt restructuring for nature conservation and climate adaptation is not new, it plays a significant role in the Caribbean, where economies face similar challenges including:
— vulnerability to the impacts of climate change such as rising sea levels, biodiversity erosion, and more frequent extreme weather events such hurricanes and tropical storms
— economic dependency on tourism and maritime trades, such as fishing
— high cost of international trade due to transport costs and high dependency on foreign imports
— limited access to reduced interest rates from international finance institutions due to use of gross national income (GNI) metrics
The multidimensional challenges faced by Caribbean nations are exacerbated by a combination of factors. These include the COVID-19 pandemic, energy and food insecurity linked to the war in Ukraine which are driving an increase in the cost-of-living, and the climate change crisis. These are some of the drivers behind the recent Bridgetown Agenda.
The Bridgetown Agenda
Presented by Prime Minister of Barbados, The Honourable Mia Amor Mottley, the title of the Bridgetown Agenda is, “Urgent and Decisive Action Required for an Unprecedented Combination of Crises, the 2022 Bridgetown Agenda for the Reform of the Global Financial Architecture”. It outlines three steps for collective action in developing a path towards a new financial system that channels financial resources towards climate action focused on the UN Sustainable Development Goals (“SDGs”). These include:
1. emergency liquidity
2. expansion of multilateral lending to governments by US$1 trillion
3. activation of private sector savings for climate mitigation and fund reconstruction after a climate disaster through new multilateral mechanisms.
These steps aim to support the scaling up of investment in the low-carbon transition in the energy, transport, and agricultural sectors; provide substantial investment in building climate-resilience and sustainability; and deliver investments in public health and education.
Creating a sustainable financing model via Climate Financing
As we assess the current position of Barbados and other small island economies, the importance of a sustainable financing model is key to increasing resilience. Three principles are highlighted:
1. Fiscal prudence: over the last few years, many small island economies have developed a high level of debt and a number of economic metrics that have warranted higher risk being placed on their debt issuances. This has been reflected in external ratings from agencies. The increased risk was also reflected in higher interest rates attached to the bonds.
As observed with both the Barbados and Belize blue bonds, fiscal prudence was exercised by refinancing the more expensive debt with more favourable terms that lowered interest rates and extended the repayment term. The fiscal space this created provides several benefits:
i. lower debt servicing requirements,
ii. more head room since debt to GDP was lowered in some instances,
iii. more cash flow to channel into the sustainability or conservation funds associated with the bonds
iv. a mechanism to maintain contributions in the “Resilience Funds” over the long term.
2. Wider pool and strong rating for investors: The structures noted above were both guaranteed by the TNC and multilaterals. In all cases, the guarantors have very strong financial ratings. E.g., the Barbados blue bond has a Triple-A rating. This structure created scenarios where the bonds were oversubscribed given the strength of the guarantors. However, equally important would have been the fact that this also created an appetite for a wider pool of investors into the region.
3. Establishment of a Conservation Endowment Fund: The goal of the foregoing structure is to set up a longterm mechanism, such that there will be funds available for conservation policy and project implementation. This will ensure that resilience funding is maintained.
A growing interest in blue bonds highlights a movement toward a sustainable model of collaboration between economic development and environmental protection, and Barbados is helping to lead the way.