Ecuador received a guarantee from the Inter-American Development Bank to help it potentially swap up to $800 million of its sovereign bonds in return for boosting conservation of the Galapagos Islands, in what would be the largest deal of its kind if completed.

IDB has approved an estimated $85 million financial guarantee to back a new debt instrument that seeks to lower the cost and refinancing risk of Ecuador’s sovereign debt, according to a document describing the potential transaction published on the website of the Washington-based bank. The IDB surety will be provided along with a political risk guarantee by the US International Development Finance Corporation, or DFC, the document said.

Credit Suisse Group Inc. plans to buy up to $800 million of three Ecuador bond issues maturing between 2030 and 2040 at prices ranging from 30.5 cents to 53.25 cents on the dollar, according to an April 26 tender announcement. Ecuador, meanwhile, plans to raise new guaranteed debt to fund that tender, the government said its current medium term debt strategy. A successful debt swap stands to help lower Ecuador’s total debt obligations as the notes are likely to be bought back at a deep discount.

The new borrowings could have an interest of around 7%, less than half the yield investors demand to hold Ecuador’s regular bonds, the document said. Specific terms of the IDB guarantee and transaction could change due to market conditions and other factors.

Savings from the swap will partly be used to create a conservation fund and provide additional revenue to protect habitats in the Galapagos Islands, according to the document on IDB’s website. Credit Suisse’s bond repurchase plan is contingent on various conditions, including Ecuador obtaining a new credit facility, also arranged by the Swiss bank.

“It is important to emphasize that while this is a private sector operation, it is part of a broader debt conversion for nature involving the Republic, which is aimed at preserving the Galapagos Islands and its marine ecosystem,” Ecuador’s government said in a statement issued April 28.

Credit Suisse, IDB, DFC and Lazard Ltd., which advises Ecuador’s government, declined to comment. Ecuador’s finance ministry didn’t respond to a request for comment.

Debt-for-nature swaps have been around since the 1980s, but have gotten a new lease of life thanks to a model set up by Credit Suisse and US nonprofit The Nature Conservancy which opens them up to institutional investors. In 2021, they teamed up to arrange a $364 million debt-for-nature swap for Belize. Last year, they struck another $150 million deal for Barbados. Swedish pension fund Alecta and Nuveen, a unit of TIAA of the US, invested in such deals. The Nature Conservancy isn’t involved in the Ecuador debt-for-nature swap.

The renewed interest has coincided with some developing countries pushing to lower debt repayments and governments worldwide seeking to protect 30% of land and sea by the end of the decade.  While Ecuador has completed debt-for-nature transactions before, they were with governments and non-governmental organizations.

Robert Weary, a former executive at The Nature Conservancy who played a key role in previous debt-for-nature swaps, is working on the Ecuador transaction, according to the website of his firm, Aqua Blue Investments.

Progress on the deal, first proposed in November 2021, comes as Ecuador’s President Guillermo Lasso faces a second impeachment attempt. At the same time, UBS Group AG’s plan to buy Credit Suisse has stoked concern about the fate of existing swaps — such as those with Belize and Barbados — and future ones.

An Ecuador transaction would provide a welcome boost. “This is exactly the type of scalability we’d like to see,” said Slav Gatchev, managing director for sustainable debt at The Nature Conservancy, in an interview.

Debt-for-nature swaps aren’t always a panacea, added Gatchev, but they can help unlock “scarce funding for biodiversity and climate at no additional burden to treasuries.”

— With assistance by Maria Elena Vizcaino and Stephan Kueffner