More on Belize: Marine Conservation is Nice; Deeper Haircuts Are Bet...

A couple of additional thoughts on Belize’s debt workout, especially the relatively novel aspect involving the pre-funding of a marine conservation trust. The deal has featured prominently in the financial press lately, with great coverage in the FT (here by Robin Wigglesworth and here by Tommy Stubbington), Bloomberg (here), and elsewhere. For details, see Mitu’s posts here and here. Mitu has a relatively optimistic take, which I’m mostly on board with. It would be wonderful if countries could both ease debt burdens and increase investment in marine conservation and other forms of sustainable growth. It would be even more wonderful if investors paid for some of this by granting significant debt relief. But even if that’s what happened with Belize—and I’m not entirely sure that it is—the Belize deal may not be replicable at a scale that would matter.

The plan is for Belize to repurchase and retire its outstanding international bond. Reports suggest that negotiations over the repurchase price were stalled at around 60 cents on the dollar. Ultimately, investors agreed to take 55. In return for that concession, Belize will prefund a $23.4 million trust to support future marine conservation projects. One potential takeaway is that investors agreed to the additional 5 cent reduction after being presented with the debt-for-nature idea, perhaps in part because intense media coverage created pressure to demonstrate their ESG bona fides.

The first point to note here is that the additional 5 cents per dollar is very large in comparison to the concessions investors seem willing to make to achieve ESG goals in other contexts.

Yields on the recent UK green gilt were roughly 0.025% lower than for a conventional gilt, and this was taken as a smashing success. That’s just one example, and perhaps not the best comparison to Belize’s distressed debt. But across a wide range of contexts, the so-called “greenium” on ESG bonds is very small—to the point that it is not always clear that it even exists. Given that evidence, it would be surprising if investors were indeed willing to reduce recoveries by over 8%—from 60 to 55 cents on the dollar—solely because Belize offered to devote $23.4 million to conservation efforts. Maybe that’s what happened here. And, to be fair, Belize’s commitment to marine protection may be more credible than the usual ESG mumbo-jumbo, given the prefunding and involvement of The Nature Conservancy. But given their relative indifference to ESG concerns in other contexts, it’s hard to believe investors really assigned such value to marine protection in this case.

Whatever happened in this particular deal, query whether the negotiating dynamics that produced it will be replicated in future debt restructurings. When investors expect to be asked to make concessions to environmental goals, they may grow less willing to make concessions on the core economic terms. In the restructuring context, it won’t always be obvious who is really funding investments in the environment—investors (by accepting less generous terms) or the populace (by accepting higher taxes, greater cuts to social programs, etc.) Indeed, despite all the attention given to the debt-for-nature aspects of the Belize restructuring, my basic take is that investors got pretty generous terms. The country’s early proposals implied writedowns of 70+ percent. It wasn’t that long ago that the superbond was trading at 40 or 45 cents on the dollar. At one point, if memory serves, it was down to around 30. I’m glad the deal got done, and I’m glad money will be devoted to funding marine conservation. But I’m a little unsure who is paying for it even in this context.

And of course, there is the question whether these investments in marine conservation would have happened anyway. One benefit of the Blue Bonds, from The Nature Conservancy’s perspective, is that these projects can accelerate investments in protecting marine areas. So perhaps all that matters is that the funds are being made available now, rather than at some point in the future. But it’s of a piece with concerns that have been raised in other ESG contexts, which is that issuers are claiming ESG credit for projects they would have undertaken anyway.

I suppose it’s possible that ESG considerations have greater weight in the debt restructuring context – although I haven’t ever heard an explanation for why this would be the case. But it is probably worth keeping in mind that these innovations work mainly at the margins, offering (at best) modest additional financing for ESG objectives. None of this is to take away from the innovative nature of the Belize deal, or from the genuinely good news that the country will have some fiscal space to invest in marine conservation. But it’s a useful reminder that genuinely massive investments are required to fund climate change adaptation and resilience. For that, Belize didn’t need a Blue Bond. It needed a deeper haircut.