El Salvador has entered into a first-of-its-kind debt buyback agreement that will use the savings generated to fund conservation along the Central American country’s main river and its watershed. The deal, valued at over $1 billion, will raise funds for conservation and water security in the Lempa River basin. This is the first time a country has included commitments to watershed protection and water security in a debt buyback, officials said. This is part of the Central American country’s government’s efforts to reduce its high external debt and is the largest funding commitment made by any country to conservation under a debt-for-nature swap, a press release said.
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Debt-for-nature deals are becoming increasingly popular for poorer nations to pay for conservation. Bonds or loans are purchased and replaced with cheaper debt, with the savings used to protect the environment. In the case of El Salvador, the bonds were replaced by a loan from JPMorgan. Several countries, from Belize to the Seychelles, have already entered into debt-for-nature deals to finance ocean and marine wildlife conservation. However, this is the first transaction in recent memory with a focus on freshwater, DFC CEO Scott Nathan said in the statement. JPMorgan arranged a $1 billion loan to El Salvador to allow the country to buy back $1.031 billion of its outstanding bonds at a discount to the issue value.
These savings enabled El Salvador to realize more than $352 million, of which $350 million will go to the Rio Lempa Conservation and Restoration Program. The money will be used by water and environmental authorities to stop river pollution, protect biodiversity, address water scarcity risks and promote regenerative agriculture in the Rio Lempa basin. “This debt restructuring represents the most ambitious and impactful environmental action in El Salvador’s history,” President Nayib Bukele said in the press release. “With this debt restructuring we want to change the ecological and economic future of El Salvador.”
An offer of $1 billion in political risk insurance from DFC, the U.S. development finance institution, and a $200 million standby letter of credit from CAF, the Development Bank for Latin America and the Caribbean, meant likely that JPMorgan was able to offer the loan at a lower cost. Debt-for-nature swaps are still a niche tool, but can work wonders for countries with the right debt dynamics, a well-planned conservation project and support from credit guarantee agencies, according to Olga Fedosova, a partner at law firm White & Case, who worked on the deal.
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