TNC’s $364 million transaction with Belize was supported by Credit Suisse as sole structuring bank and arranger of the financing, and the U.S. International Development Finance Corporation as political risk insurance provider.
Willis Towers Watson created the world’s first sovereign debt “catastrophe wrapper” for this transaction, which provides insurance protection to cover Belize’s loan repayments after hurricane events. The wrapper around the 20-year sovereign debt structure strengthens sustainability and resilience to climate shocks which have previously triggered credit rating downgrades that have exacerbated economic hardship.
Dr Simon Young, a Senior Director at Willis Towers Watson’s Climate and Resilience Hub, is an expert in parametric insurance and led the design of the catastrophe wrapper. Dr Young said: “Volcanoes, earthquakes, and hurricanes repeatedly disrupt economic development in the Caribbean region, from households and communities to the sovereign level. That disruption leads to higher debt and a longer, more painful path to recovery.
“The parametric wrapper is a game changer for the financial resilience of island and coastal nations and will help to unlock the financing of nature-based solutions in achieving global net zero and biodiversity targets.”
The parametric insurance transaction was marketed and placed by Willis Towers Watson’s Alternative Risk Transfer team, with competitive pricing achieved in a hard market for Atlantic hurricane risk. Munich Re provided best terms and conditions and were awarded 100% of the placement, which covers the first 31 months of the bond term.
Belize’s economy, heavily dependent on tourism, contracted by 14.1% in 2020. In March 2021, the IMF noted that “building resilience to climate change and natural disasters would lower output volatility and boost growth” and recommended that the authorities develop a comprehensive Disaster Resilience Strategy that includes insurance.
As part of Belize’s debt restructuring programme, Belize repurchased its only international bond with $364m of capital arranged by The Nature Conservancy and insured by the International Development Finance Corporation. This commitment enabled Belize to restructure approximately US$553 million of external commercial debt - an amount that represents 30 percent of the country’s GDP - and reduce the national debt by 12 percent.
The transaction is backed by the proceeds of a “blue bond” arranged by Credit Suisse. This includes prefunding a $24m endowment to support future marine-conservation projects,well as a commitment by Belize to protect 30% of its waters by 2026 and fund approximately $4 million annually into an independent domestic conservation fund.
As global development finance institutions consider integrating climate risks within their mainstream sovereign loan programmes, the Willis Towers Watson placement is seen as a template for integrated protection for creditors and issuers. The parametric wrapper uses objective rather than subjective criteria to trigger the benefits - which brings comfort to creditors - and it pays upfront for relief of debt servicing payments when disaster strikes, rather than just extending the repayment schedule. The deal also reinforces recommendations made in a new report from Cambridge Institute for Sustainability Leadership, with input from financial regulators and policy makers, that climate insurance should be integrated with sovereign debt systems.
The placement is the latest output from Willis Towers Watson’s Global Ecosystem Resilience Facility (GERF) launched in 2018 that has led the protection of natural assets including coral reefs, mangroves and forests.
Kevin Bender, Senior Director of Sustainable Debt at The Nature Conservancy (TNC), said: “Many coastal and island nations have three closely interlinked features: economic reliance on their valuable natural resources, higher exposure to the damaging effects of climate change, and unsustainable debt loads. In order to help solve the conservation funding needs of these nations, we also have to solve a complex web of financial risks. The catastrophe wrapper designed by Willis Towers Watson for the Belize transaction is a brand new solution that fills a much-needed gap.”
Michael Roth, Public Sector Practice Lead in the Capital Partners team at Munich Re, said: “Parametric insurance will be a powerful tool enabling borrowing countries hit by natural disasters to benefit from financial relief by a temporary waiving of debt service. By reducing the credit risk for sovereign lenders, borrowing countries may improve access to, as well as terms and conditions of, debt finance. The blue bond transaction combines nature conservation, risk reduction, sovereign financing and risk transfer in a unique way. We hope the bespoke Blue Bond transaction will be just the starting point for more environmental oriented shock-resilient sovereign debt bonds and loans to follow.”
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