Ecuador’s $650 million debt-for-nature swap targets Galápagos protection

The country has conducted the world's largest such swap in what is likely to be a template for others to follow

In a stroke of impeccable timing, just before descending into its most recent political crisis, Ecuador conducted its first debt-for-nature swap in early May – the largest in the world to date¹.

Although the transaction itself did not significantly reduce the government’s debt stock, it was immensely valuable from a conservation perspective, permitting the authorities to utilise savings to finance conservation activities in the Galápagos.

Credit Suisse acted as global lead arranger for the transaction, facilitating a debt buyback and offering to purchase up to $800 million market value of Ecuador’s external bonds. Ultimately, investors tendered around $656 million at market value ($1.6 billion face value); shortly thereafter, a special purpose vehicle known as GPS Blue Financing DAC issued a “blue bond” for this amount directly to Credit Suisse, which then sold it on to investors at a yield of 5.645%².

The blue bond received a rating of Aa2 from Moody’s, 16 notches above Ecuador’s sovereign rating, as it came with an $85 million guarantee from the Inter-American Development Bank (IADB) and $656 million in political risk insurance from the US International Development Finance Corporation (DFC), while 11 private insurers provided reinsurance.

This transaction will lead to a roughly 1.6% reduction of Ecuador’s non-financial public sector (NFPS) debt stock (Figure 1), equivalent to 0.8% of GDP. While the reduction in the overall debt stock is not material, the transaction itself enables the government to generate savings that will be invested in conservation efforts in one of the most environmentally diverse areas on the planet, home to many species that do not exist anywhere else in the world. According to the DFC, the transaction “will generate an estimated $323 million for marine conservation in the Galápagos Islands over the next 18.5 years“.³

Figure 1: Ecuador NFPS debt/GDP %

Source: Ecuador Ministry of Economy and Finance, March 2023

The timing of this debt-for-nature swap was remarkable, taking place less than two weeks before President Lasso invoked the “mutual death” constitutional clause, resulting in dissolution of the National Assembly and triggering an early general election, which will result in a new president and Assembly before the end of this year⁴.

Ecuador’s political turmoil makes it unlikely that we will see another debt-for-nature swap from the country over the next couple of years. However, other governments are likely to follow its lead and that of those who went before it, such as Barbados⁵ and Belize⁶, using this template as a means of accessing the market, securing debt relief and investing in much-needed conservation efforts.

15 Juni 2023

Sarah Glendon

Senior Research Analyst, Emerging Markets Debt Team

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Ecuador’s $650 million debt-for-nature swap targets Galápagos protection

¹Inter-American Development Bank, Ecuador Completes World’s Largest Debt-for-Nature Conversion with IDB and DFC Support, 9 May 2023

²Inter-American Development Bank, Ecuador Completes World’s Largest Debt-for-Nature Conversion with IDB and DFC Support, 9 May 2023

³Credit Suisse, Financial Close Reached in Largest Debt Conversion for Marine Conservation to Protect the Galápagos, 9 May 2023

⁴FT.com, Ecuador’s president triggers ‘mutual death’ clause to hold elections, 17 May 2023

⁵Bloomberg, Barbados Swaps $150 Million of Sovereign Debt to Save Sea, 21 September 2022

⁶IMF, Belize: Swapping Debt for Nature, 4 May 2022

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