IMPACT Awards 2023

Impact project/investment of the year - oceans and coastal zones; Impact initiative of the year, global: Debt conversion for marine conservation in the Galapagos Islands

[This article has been updated to provide details of the role of Climate Fund Managers and Oceans Finance Company.]

In May, the Republic of Ecuador completed the world's largest debt conversion for nature.

Credit Suisse, as sole structurer and arranger underwrote and placed the 18.5-year $656 million bond to provide funding for the protection of the Galápagos Islands and its marine ecosystem.

The refinancing enabled Ecuador to retire $1.6 billion of its international bonds, reducing its debt stock by almost $1 billion.

This transaction makes available an estimated $450 million in new conservation funding by 2041 via debt savings, it said.

Funding will be distributed via a US trust fund operating in the Galápagos, the Galápagos Life Fund (GLF), in a public-private partnership.

The deal is expected to provide financial resources to effectively manage Galápagos' marine reserves, including a newly created 60,000km2 Hermandad Marine Reserve that protects migratory species by linking the marine reserves of Ecuador, Colombia, Costa Rica, and Panama that form the Eastern Tropical Pacific Marine Corridor.

The GLF will provide grants to support marine conservation and capitalise an endowment projected to be worth $227 million by 2041, with the aim to finance grants in perpetuity.

In addition, should Ecuador fail to meet its marine conservation commitments within the agreed timeline it will be subject to additional payments under the Galápagos Loan, which ultimately would flow into additional conservation funding rather than to bondholders.

Ecuador's marine resources remain under intense pressure from overfishing and climate change. In the first four months of 2023, Ecuador accounted for 42% of the total catch by netted (purse-seine) and pole-and-line vessels in the Eastern Pacific Ocean and is home to one of the world's largest small-scale artisanal fishing fleets, estimated at 55,000 vessels.

Photo credit: Chris Schmid

Ecuador has agreed to several time-bound commitments that promote sustainable fishing and climate resilience initiatives to support a blue economy developed with technical assistance from Pew Bertarelli Ocean Legacy Project, a partnership between philanthropist and ocean advocate Dona Bertarelli and The Pew Charitable Trusts, a US-based non-profit.

The transaction was backed by a $656 million political risk insurance policy from the US International Development Finance Corporation (DFC) – to de-risk the transaction – and an $85 million unfunded guarantee from the Inter-American Development Bank (IDB) to support the required liquidity reserves.

It is the first debt conversion to date to use an unfunded structure for this purpose. This further reduced Ecuador's financing cost, resulting in even greater fiscal and conservation benefits, it said.

Oceans Finance Company (OFC), a portfolio company of Climate Investor Two (CI2), a blended finance fund managed by Climate Fund Managers, was one of the key advisors in the transaction, assisting in developing the deal and together with other parties and provided early-stage development capital. Going forward, OFC is on the board of GLF and has an ongoing project management role over the lifespan of the transaction.

The political risk insurance policy and guarantee also enabled the Galápagos Bonds to receive an Aa2 credit rating from Moody's, a 16-notch upgrade from Ecuador's Caa3 rating.

By monetising the high discount at which the international bonds were trading, Ecuador was able to realise a debt service cost reduction of $1.5 billion.

Post-closing, Credit Suisse successfully placed the Galápagos bonds globally to investors. To create and close the deal, Ecuador collaborated with the Pew Bertarelli Ocean Legacy Project, Dutch financier Oceans Finance Company, and US investment firm Aqua Blue Investments.

One IMPACT awards judge praised the conversion as an "excellent initiative in debt-raising and biodiversity, making a huge amount available for conservation to benefit one of the most biodiverse and vulnerable areas".

Another called it an "innovative financing solution for marine conservation" in an "underserved space" relative to the funding for forestry and other land-based strategies.

"This investment will have significant climate and biodiversity benefits and demonstrates what can be adopted in other geographies to drive finance for conservation," they added.

Transaction highlights:

  • Credit Suisse tendered $1.629 billion of Ecuador's US dollar-denominated global bonds across three tranches (bonds that mature in 2030, 2035, and 2040) at an average price of 40%.
  • Credit Suisse sold the tendered bonds to GPS Blue, which it financed by issuing the Galápagos Bond for the same cash proceeds.
  • GPS Blue and Ecuador exchanged the bonds for the $656 million Galápagos Loan.
  • Flows from Ecuador's payments on the Galápagos Loan are used by GPS Blue to repay its obligations, including its agreed conservation payments to the GLF.
  • Ecuador pays a guarantee premium to the IDB for a guarantee to GPS Blue that it can use to cover interest and expenses during an arbitration proceeding.
  • The DFC provides political risk insurance to cover the Galápagos Loan.

GLF safeguards and impact measurement

The Galapagos Life Fund has safeguards (social and environmental) in place in addition to the political risk insurance to monitor that the commitments taken by the government are fulfilled.

The security management plan evaluates the status of enforcement activities in the country, its procedures, regulations, and capacity to ensure the accomplishment of commitments of protection for the Galapagos Marine Reserves (including Hermandad).

The GLF is also committed to work with the local community to ensure the funding that emerged from the transaction benefits the inhabitants of the Galapagos Islands. The Galapagos Life Fund has established a number of conservation priorities that are embedded into its statute and as such the funding disbursed through the grant-making will have to be in line with these priorities.

The priorities are entirely focused on achieving stronger protection for biodiversity and fisheries in the Galapagos Marine Reserve and Hermandad Marine Reserve while supporting a more resilience local population

The GLF board is responsible for active oversight, including ensuring annual independent external financial audits. Additionally, records related to the projects and funds must be examined by an external, internationally recognised expert at least once every three years.