Credit Suisse Demise Opens Another Hole in Climate Financing
Exhibit: Blue Bonds Principles
Source: The Nature Conservancy
Key Points: Climate finance is more vulnerable than other sectors to a banking crisis because fewer banks engage with emerging companies/newer financial products. We discussed SVB in a separate article; here we note Bloomberg reporting of a Credit Suisse niche in “nature” bonds — blended finance vehicles that lower debt costs in exchange for nature action.
SVB’s bankruptcy looks set to slow startups’ development. Silicon Valley Bank’s (SVB) outsized role in providing banking services (including specifically venture-related loans) to startups included a dominant presence in some segments of “climate tech,” new technologies directed at producing carbon-free energy or in some form of decarbonization. The bank’s demise thus threatens to slow climate tech companies’ commercialization and growth, which, in turn, suggests a slower pace of energy transition (although calibrating how much of a delay or impact might be impossible). A silver lining, as we discussed in in an opinion piece in The Hill, it is that one would hope for a diffusion (of people in the climate venture capital ecosystem and of knowledge of emerging technologies) to many banks that can lead to much more financial support over time.
Credit Suisse’s fall may slow novel environmental bond issuance. In what admittedly is a smaller example than SVB, the investment bank played a key role as a facilitator in issuing some novel nature-protection related bonds. The largest category of these is “Blue bonds” (see description below). Per Bloomberg, Credit Suisse was the sole arranger of the largest blue bond issued to date, $364 Million (MM) to Belize in 2021, and of a $150MM issuance to Barbados last year. Blue bonds appeared poised to grow, with Bloomberg reporting that Gabon ($700MM), Ecuador ($800MM) and Sri Lanka ($1 Billion) all working towards issuance.
Credit Suisse was also the sole structurer and joint book runner on the World Bank’s $150MM “Rhino bond,” designed to fund the protection of black rhinos in South Africa.
Blue bonds offer a chance for a country to lower its debt burden in exchange for protecting ocean areas. A relatively new product, blue bonds are loans with two purposes: 1) to refinance a country’s outstanding debt and therefore offer some relief and 2) to allocate some of the newly borrowed funds to a program to preserve and protect ocean areas (see Exhibit). Blue bonds are thus an extension of debt-for-nature swaps first conceived in the 1980s.
Blue bonds have been orchestrated and managed by The Nature Conservancy (TNC). Grant funding (sourced in part from TNC as one of the recipients of The Audacious Project) helps initiate projects. Loan insurance provided by the U.S. International Development Finance Corporation (i.e. public support) helps private investors accept lower returns and so the new loan carries a lower interest rate. Also, for at least the Belize debt, the proceeds were used in part to buy back existing bonds that were trading a steep discount, thereby lowering the country’s outstanding loan balance.
3/22/2023