El Salvador: Historic Debt-For-Nature Swap

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El Salvador took advantage of September’s bumper national debt sales to refinance its external debt through a special purpose entity via JPMorgan Chase. Putting its entire $7.2 billion external debt for tender, the country eventually agreed to buy back $1.03 billion, or 14% of its bonds set to mature between 2027 and 2052.

Bonds with earlier maturity dates are more popular for resale by bondholders. The platform, provided by JPMorgan Chase, is a debt-for-nature swap of significant proportions.

“This debt conversion represents the most ambitious and impactful environmental action in El Salvador’s history,” President Nayib Bukele said. “With support from international parties, we are executing the largest debt conversion transaction of its kind to date.”

This is the fourth debt buyback offer El Salvador has made since 2022, which began with a liquidity crisis. S&P rated the nation’s outlook at B- with a stable outlook and called the debt swap “opportunisticaction.”

In September, corporations looked to secure finance ahead of possible market turbulence, and over 1,225 issuances saw $600 billion of bonds traded during the month. The move took many market analysts by surprise, with many blaming the November US election and recession fears that surfaced in August.

According to the El Salvadoran government, the refinancing will provide savings of $352 million in debt service costs. The US International Development Finance Corporation provided $1billion in political risk insurance and the Development Bank of Latin America and Caribbean added $200 million as a standby letter of credit.

Robert Cozzari, co-head of Latin American markets at JPMorgan, told Bloomberg that El Salvador brought “all parties together” for a capital market initiative that will achieve execution certainty and cost savings.

The costs saved by the buyback will go toward the conservation and restoration of the Lempa River basin, which is the largest in the country and provides water security for El Salvador, Guatemala, and Honduras. Under the agreement, the El Salvadoran government will establish an entity to oversee the conservation, create a water resources data monitoring service and declare 75,000 hectares of protected aquifer recharge zones by 2044.

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