Debt swaps arranged by Credit Suisse, Bank of America face scrutiny
BOND deals arranged by Credit Suisse and Bank of America (BOA) in connection with debt swaps for emerging-market issuers are facing renewed scrutiny, after the International Capital Market Association (ICMA) issued new labelling guidelines.
The bonds were sold over the past few years to finance so-called debt-for-nature swaps, through which sovereigns refinance their debt in exchange for marine conservation pledges. Credit Suisse and BOA labelled the bonds “blue” to reflect those commitments.
Nicholas Pfaff, deputy chief executive and head of sustainable finance at ICMA, said issuers “are using the blue bond terminology, but doing something completely different”. That is leading to “regrettable confusion”, he added.
Spokespeople for Credit Suisse and BOA declined to comment.
ICMA is the most widely followed global standard setter in debt markets, with investors, issuers and underwriters following its guidelines on a voluntary basis. The blue bonds arranged by Credit Suisse and BOA were sold before ICMA had set clear standards around how to label such instruments.
Blue bonds are a small but growing corner of the sustainable debt market, which is currently dominated by green bonds. To warrant a green or blue label, a bond issuer must put all the proceeds generated through a sale towards environmental (green) or maritime (blue) goals, according to ICMA.
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The blue bonds arranged by Credit Suisse and BOA were used to help refinance over US$1 billion in debt for Belize, Barbados and Gabon over the past few years, as part of a blue bond programme created by The Nature Conservancy (TNC), a US non-profit.
A spokesperson for TNC declined to comment.
In all three cases, the proceeds of the bonds covered the refinancing operation, with only a small amount of money going towards marine conservation, documents attached to the deals show.
ICMA defines green bonds as “any type of bond instrument where the proceeds or an equivalent amount will be exclusively applied to finance or refinance eligible green projects”, with blue bonds representing “a subset of that”, said Simone Utermarck, director of sustainable finance at ICMA. The blue bonds being sold in connection with debt-for-nature swaps are “a completely different construct”, she added.
There has been “genuine confusion around terminology, which we aim to address”, Pfaff said.
The nascent market for blue bonds is still finding its footing, and remains unregulated. Against that backdrop, analysts at Barclays said earlier this year that the blue bond label was being applied too liberally in the debt-for-nature-swap market, and warned that the practice represented a “real risk of greenwashing”.
Bankers behind the deals have listed the risks that investors face, in the documents accompanying the bonds.
In its prospectus for a US$500 million blue bond backing a debt-for-nature swap for Gabon, BOA said investors “should be aware” there is no guarantee “as to the compliance of the notes with any blue, green or other sustainable investment criteria, principles or guidelines or market practice”.
Still, Pfaff said ICMA does not “underestimate the risk” of market participants in general, “entertaining ambiguity about whether something is a use-of-proceeds bond or not”. This would be “a significant negative development”, he said.
There are signs that some bankers are adjusting their approach. A deal arranged earlier this year by Credit Suisse – now part of UBS – avoided the blue label on a bond backing a US$656 million swap for Ecuador. Instead, it was marketed as a “marine conservation-linked bond”.
Accurate labelling matters, as such bonds feed into the wider market for sustainable debt, which ICMA estimates is worth about US$3 trillion. Meanwhile, a growing number of banks have voiced interest in arranging debt-for-nature swaps, including HSBC Holding, Citigroup, Barclays and Standard Chartered.
Some investors are already treating bonds tied to debt-for-nature swaps with a degree of caution.
Alecta, a Swedish pension fund that holds blue bonds issued in connection with a swap for Belize arranged by Credit Suisse, does not include the investment in its disclosures on green bonds. Instead, the investor categorises the bond under “other investments with social and environmental impact”, said Carina Silberg, Alecta’s head of governance and sustainability.
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