Ecuador exchanged USD 1,630 million in sovereign bonds for a credit of USD 656 million. The capital saved will be used for conservation plans for the Galapagos.
Authorities during the announcement of the issuance of blue bonds. Quito, May 9, 2023.
With the bond swap operation , announced by the Government on May 9, the principal of Ecuador’s external debt in bonds was reduced by USD 972 million.
In this way, the debt balance will drop from the current USD 17,657 million to USD 16,685 million, a reduction of 5.5%.
The operation also reduces the payment of interest on the external debt in bonds, with which the total savings for the State will be USD 1,126 million , according to the Minister of Finance, Pablo Arosemena.
Putting together the exchange operation took a year and a half, as the Government announced it for the first time in November 2021.
In addition to reducing the weight of the external debt, the objective is to transfer a part of the savings to the conservation of 198,000 kilometers of ocean in the Galapagos, explained Foreign Minister Gustavo Manrique.
Here’s what we know so far about the swap deal:
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Who participated?
The Swiss investment bank Credit Suisse organized and structured the issuance of a bond linked to the marine conservation of Galapagos, for USD 656 million.
These types of instruments are known as blue bonds , since part of the resources are allocated to conservation of the oceans and water.
Credit Suisse explained in a statement that the issuance of the bond was made in agreement with five participants:
- The Ecuadorian State.
- Inter-American Development Bank (IDB).
- The United States International Development Finance Corporation ( DFC ).
- Ocean conservation organizations : Oceans Finance Company ( OFC ) and Pew Bertarelli Ocean Legacy.
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How does it work?
The first step was taken on April 26, 2023, when Credit Suisse announced the purchase of a part of the external debt in bonds that the Ecuadorian State had restructured in 2020 and that it had to pay until 2040.
Credit Suisse ‘s intention was to allocate USD 800 million to purchase the bonds, but in the end it invested USD 656 million.
Credit Suisse raised the money through the issuance of the blue bond or bond linked to the marine conservation of Galapagos.
With those USD 656 million, which were obtained with the blue bond, the Swiss bank bought the equivalent of USD 1.630 million of Ecuador’s old debt bonds, which have already been canceled or eliminated.
Arosemena explained that Credit Suisse paid around USD 0.40 for each dollar of Ecuadorian debt bonds.
Now, Ecuador will no longer have to pay the USD 1.630 million of the debt represented in these bonds.
Instead, the country will pay USD 656 million. This is what is known as a debt swap.
The Government has not yet clarified whether the creditor of the new debt is Credit Suisse.
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What are the conditions?
The USD 656 million loan has a guarantee of USD 85 million from the IDB and also has political risk insurance issued by the DFC.
The two instruments allowed Ecuador to obtain this loan at an interest rate of 6.9% per year and a term of 18.5 years , explains the dean of the Business School of the University of the Americas (UDLA), Santiago Mosquera.
Due to Ecuador’s high country risk, which before the exchange exceeded 1,800 points , the markets would have charged the country an interest rate of more than 20% per year.
Mosquera explained that the DFC insurance , which is for USD 656 million, covers the operation in the event that Ecuador cannot pay the credit due to operational problems , such as the closure of accounts abroad.
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How much does Galapagos receive?
A part of the resources that Ecuador is saving by exchanging the bonds will be used for the protection of the marine reserve in the Galapagos and for conservation research, explained Foreign Minister Gustavo Manrique.
USD 450 million will be administered by the Galapagos Life Fund (GLF) consortium, a non-profit organization created for this purpose.
Of the USD 450 million, some USD 222.9 million are for ocean conservation and care projects in Galapagos.
And another USD 100 million will go to a special fund or trust , which will invest the money to obtain returns to finance projects in the Galapagos.
Returns from the trust and donations could bring another $127 million to the project through 2041.
