Nuveen LLC has bought 80% of a rare blue bond designed to help finance debt relief for Barbados and protect its marine environment.
(Bloomberg) — Nuveen LLC has bought 80% of a rare blue bond designed to help finance debt relief for Barbados and protect its marine environment.
The investment firm, which is a unit of TIAA, has taken on an anchor role in the transaction, investing almost $60 million in the bond, it said on Tuesday.
It’s the first time Nuveen has allocated capital to a bond that’s tied to a so-called debt-for-nature swap. The announcement comes as investors try to get a sense of how safe the market is, amid worries its complexity isn’t matched by adequate transparency or regulatory oversight.
Analysts at Barclays Plc are among those to have raised concerns that the blue bonds being generated in connection with debt-relief arrangements aren’t always following the strict use-of-proceeds standards associated with the much larger market for green bonds.
Investor demand for the Barbados blue bond was initially “tepid,” said Stephen Liberatore, head of ESG and impact, global fixed income at Nuveen. In an effort to attract more interest, the asset manager then ramped up its due diligence, he said.
“It’s a matter of is it a material output and is there enough additionality,” Liberatore said in an interview. “It’s a reasonable question to raise and I think that’s why it’s so important to be able to do your own due diligence.”
The debt was issued in two tranches by BB Blue Financing Designated Activity Co., a special purpose vehicle incorporated in Ireland, and underwritten by Credit Suisse Group AG. A $24.4 million tranche was guaranteed by the Nature Conservancy, a US nonprofit, while $48.8 million was backed by the Inter-American Development Bank, a multilateral development institution, Liberatore said.
Both tranches have a fixed 4.4% interest rate. Nuveen holds all of the TNC tranche and $33.8 million of the IADB tranche, Liberatore said.
The transaction is helping to finance a deal that Barbados struck last year to buy back $150 million of a $531 million sovereign bond and convert that into cheaper debt. The savings generated — estimated at about $50 million over 15 years — will be used to protect the coral reefs and other ocean environments attached to the Caribbean island, Nuveen said.
Previous blue-bond transactions have attracted scrutiny amid concerns that the label might mislead investors. According to the International Finance Corporation, the proceeds of such instruments should go exclusively to blue goals. In practice, that standard isn’t always being followed, analysts at Barclays recently noted. IFC is currently drafting guidelines for blue bonds with the International Capital Market Association.
Liberatore said Nuveen’s focus is on whether the blue bond fits its own proprietary impact framework, rather than whether it meets international norms like the ICMA green bond principles or the recently agreed European Green Bond Standard.
“When we look at these transactions, we are focused purely on transparency and disclosure,” he said. “Are the proceeds being used in a manner that aligns with our framework, and are we able to receive relevant and timely impact metrics that allow for us to evaluate how the proceeds are being utilized?”
Nuveen is now talking to its investors “about what’s available and also trying to speak to the broader market as a whole — issuers, underwriters, investors — to give them an idea of where there is potential interest in trying to encourage more transactions,” Liberatore said.
Nuveen is also talking with TNC and the government of Fiji about a potential debt-for-nature swap or blue bond, Liberatore said. That deal could be worth up to $100 million.
Other countries to have signaled similar plans include Gabon, which has proposed a $700 million restructuring; Ecuador, which is said to be working on an $800 million transaction, and Sri Lanka, which is considering a $1 billion deal. Analysts expect the global debt-for-nature swaps market to eventually exceed $800 billion.
The biggest such arrangement to date was struck in connection with a debt-for-nature swap deal for Belize, in which the country bought back $553 million of debt at a discount. That arrangement, which was financed using $364 million of blue bonds, has faced criticism from debt analysts for what they characterize as unusually high transaction costs and a lack of transparency.
Liberatore said Nuveen looked at the Belize deal but turned it down. “We weren’t able to get as much access to impact data and reporting information as we would’ve liked,” he said.
Read More: Wall Street’s Newest ESG Target: $2 Trillion in Sovereign Debt
Last year, Nuveen invested $50 million in the World Bank Wildlife Conservation Bond — aka the Rhino Bond — which aims to finance the protection of South Africa’s endangered black rhinos. And Nuveen was lead investor in the world’s first blue bond when it was issued by the Seychelles in 2018.
“There is a great opportunity to really start evaluating the risk-return profile for marine-based projects and to identify the ability to tie the environment to economics and to the economy of the local country,” Liberatore said.
The investment management industry has done “a great job of valuing extractive industries, but we haven’t been able to really do as much as we should around valuing the environment and how that translates into economic growth, economic health and further opportunity,” he said.
(Adds Nuveen comment on Belize deal in 16th paragraph.)
More stories like this are available on bloomberg.com
©2023 Bloomberg L.P.