Overview: NatureVest, the impact investing unit of The Nature Conservancy (TNC), was awarded a proof of concept grant in 2016 Q3. TNC will use the Convergence Design Funding to design a Blue Bond that will finance debt conversions for Small Island Developing States that face climate change challenges. Debt conversions provide funding to governments in exchange for their commitment to improve policies and invest in marine conservation and climate adaptation activities. TNC have demonstrated the viability of the debt conversion model through the recently-closed transaction for the Seychelles, a low-lying island nation highly vulnerable to the threats of climate change. The Blue Bond will be designed to fund multiple debt conversion opportunities. In a single-country debt conversion, NatureVest will raise both debt and grants for a newly created in-country non-profit trust. The trust purchases a portion of the country’s debt from creditors at a discount, and then allows the country to repay the trust on more manageable terms. The trust then repays the initial investors and uses the remaining capital to fund a range of critical conservation activities. Activities could include reef and mangrove restoration and the creation of marine protection areas. The Blue Bond structure is illustrated below.
Design question and learning potential for the market: How can a Blue Bond be designed and issued to support multiple, complex debt conversions for conservation?
The Blue Bond will be a highly innovative structure, financing multiple debt conversions to support the conservation efforts of Small Island Developing States susceptible to the adverse effects of climate change. Through the leveraging of capital market principles and financial engineering, the Blue Bond and underlying debt conversions will introduce institutional investors to the asset class and mobilize private capital into crucial conservation activities. A reduction in transaction costs will be achieved by aggregating fundraising for multiple debt conversions, as a single debt conversion on a deal-by-deal basis is costly and time-consuming. TNC’s design activities will provide key insights into the Blue Bond’s creation and structuring process, legal preparatory work, and issuance process.