Goldman, BofA Are Working on a Debt-Swap Deal for Ecuador

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(Bloomberg) -- Goldman Sachs Group Inc. and Bank of America Corp. are laying the groundwork for a swap that will help Ecuador manage its debt financing costs in exchange for a pledge to protect part of the Amazon rainforest, according to people familiar with the matter.

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The two investment banks are preparing a deal ahead of formally engaging with potential investors for the transaction, said the people who asked not to be identified discussing private talks. The Nature Conservancy, a non-governmental organization, will be an adviser on the deal, they said.

The transaction will take the form of a so-called debt-for-nature swap, whereby a portion of existing debt is refinanced by selling a new bond at better terms, with a chunk of the savings going toward nature conservation. Such swaps typically occur when the existing debt trades at a discount, and they usually involve the provision of guarantees from multilateral lenders such as the Inter-American Development Bank on the new bond. The arrangement functions as a sweetener for private investors, and is intended to keep debt costs down for the borrower.

“We are always working on green growth issues and aligning conservation with environmentally-friendly growth and job creation,” Ecuador Finance Minister Juan Carlos Vega wrote in a statement responding to a request for comment. “The reduction of the debt stock is also a beneficial objective for the country.” He declined to comment on specific transactions.

Spokespeople for Goldman Sachs and Bank of America declined to comment.

Last year, Ecuador completed the largest ever debt-for-nature swap of its kind, a transaction that is expected to generate more than $1 billion worth of savings for the government while helping to protect habitats of the Galapagos Islands. Credit Suisse, which was taken over by UBS Group AG last year, arranged the transaction.

The market for debt-for-nature swaps had been dominated by Credit Suisse before its takeover, and Bloomberg has previously reported that UBS is now looking to do its first such deal for Barbados in the form of a so-called debt-for-climate swap. Other banks to have voiced interest in helping arrange similar swaps include Citigroup Inc., Barclays Plc and Standard Chartered Plc. BofA arranged a $500 million debt-for-nature swap for Gabon last year.

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There’s “great potential” for such projects in helping countries meet their conservation and climate goals, a representative for The Nature Conservancy said in an emailed statement to Bloomberg. The institution, which has advised on debt-for-nature swaps for a number of countries including Belize, Barbados and Gabon, declined to comment on Ecuador’s potential deal.

Last month, Fitch Ratings confirmed Ecuador’s long-term foreign currency debt rating at CCC+, which is seven steps below investment grade. A bond issued in connection with a debt-for-nature swap would likely carry an investment grade, thanks to the guarantees provided by multilateral lenders.