Sep 24, 2022 - Economy

How Barbados took advantage of rising yields

Illustration of a dollar-sign shaped wave on a beach shore

Illustration: Sarah Grillo/Axios

The island nation of Barbados is taking advantage of the market downturn.

Why it matters: As Barbados's debt price started to decline in the face of higher global interest rates, that gave the country the opportunity to buy it back at a discount, and to use the savings — some $50 million, over the next 15 years — to protect its precious oceans.

How it works: Barbados issued $150 million of new debt at almost a risk-free rate, thanks to guarantees from the AAA-rated Inter-American Development Bank (IDB) and the AA-rated Nature Conservancy (TNC). It used the proceeds to buy back higher-yielding existing debt at 92 cents on the dollar, according to Slav Gatchev, the leader of TNC's sustainable debt team.

  • The new "blue bonds" are popular among impact investors, and have very close to preferred creditor status, since sovereign borrowers in the Americas never default to the IDB — "the de facto lender of last resort," as Gatchev puts it.
  • If Barbados ever misses a payment, the IDB and TNC will pay the coupon instead — and immediately Barbados will owe them the money. Defaulting on this bond would effectively mean going into arrears to the IDB, and that is unlikely enough that TNC is happy to take the credit risk.
  • The bond also includes a 2-year grace period on payments in the event of a hurricane or other natural disaster.

The bottom line: The world's oceans contribute an estimated $3 trillion to global GDP, according to the UN, and are particularly important to the nations collectively known as Small Island Developing States — or, alternatively, Large Ocean States.

  • This kind of financial engineering helps keep oceans healthy, not only in Barbados but also in Belize and the Seychelles.
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