New ethical bonds from Africa may face weak demand from investors after Gabon suffered a coup just following the completion of a debt-for-nature swap, according to BNP Paribas SA.
(Bloomberg) — New ethical bonds from Africa may face weak demand from investors after Gabon suffered a coup just following the completion of a debt-for-nature swap, according to BNP Paribas SA.
Soldiers seized power in OPEC member Gabon this week, which came two weeks after the $500 million debt swap. That was the first such deal in continental Africa, which is trying to catch up on ethical debt after having lagged a global boom in recent years.
“If countries in Africa were planning on ESG bonds near term, they would probably have to put that aside for now,” said Trang Nguyen, global head of emerging-market sovereign credit strategy at BNP Paribas, the top arranger of ethical bonds. “Just given what’s happened in Gabon, demand from investors may be lacking and even if there is demand, they may well have to pay higher prices in order to issue as conditions are just not optimal at the moment.”
Ethical debt has been growing in emerging markets even as new issuance of conventional bonds has stalled since the Ukraine war amid a surge in risk premiums. Yet sales of such debt from Africa have totaled just $4.2 billion this year, less than 0.5% of the global tally, according to data compiled by Bloomberg Intelligence.
Gabon, where nine-tenths of the landmass is covered by trees, completed the debt-for-nature swap, arranged by Bank of America Corp., to help refinance a portion of its debt and raise funds for marine conservation.
It was the latest in a string of deals showing that committing to conservation goals can help governments overcome borrowing challenges. Belize, Barbados and Ecuador have struck similar transactions.
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In a sign of investor concern following the Gabon coup, the extra risk premium on African sovereign dollar debt has approached distressed levels at 945 basis points, the highest since mid-July.
The military action triggered a record slump in Gabon’s mostly junk-rated international bonds, but they recouped some of their losses on Friday. The takeover in Gabon has intensified the country’s financing challenges, Moody’s Investors Service said.
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It’s the ninth military takeover in sub-Saharan Africa since 2020. It will have broader implications for bond sales from African governments, whether ESG or not, according to Nguyen. That sentiment was echoed by Thys Louw, an emerging-market debt portfolio manager at Ninety One.
“Whether it’s through a debt-for-nature swap or whether it’s through conventional bonds, this is already a tough period for high yield issuers, so it’s just another negative for them, particularly given the perceptions around political stability across the region,” Louw said.
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