Credit Suisse served as the sole structuring bank and arranger of the financing for TNC's $364 million transaction with Belize, and the US International Development Finance Corporation served as the political risk insurance provider.
For this transaction, Willis Towers Watson created the world's first sovereign debt "catastrophe wrapper," which provides insurance protection to cover Belize's loan repayments following hurricane events. The wrapper around the 20-year sovereign debt structure improves sustainability and resilience to climate shocks, which have previously resulted in credit rating downgrades, exacerbating economic hardship.
Dr Simon Young, a Senior Director at Willis Towers Watson's Climate and Resilience Hub, is a parametric insurance expert who oversaw the design of the catastrophe wrapper. "Volcanoes, earthquakes, and hurricanes repeatedly disrupt economic development in the Caribbean region, from households and communities to the sovereign level," Dr. Young explained. This disruption results in increased debt and a longer, more painful road to recovery.
"The parametric wrapper is a game changer for the financial resilience of island and coastal nations, and it will help to unlock the financing of nature-based solutions in the pursuit of global net zero and biodiversity targets."
Willis Towers Watson's Alternative Risk Transfer team marketed and placed the parametric insurance transaction, achieving competitive pricing in a difficult market for Atlantic hurricane risk. Munich Re offered the best terms and conditions and was awarded 100% of the placement, which covers the first 31 months of the bond term.
Belize's economy, which is heavily reliant on tourism, will contract by 14.1 percent in 2020. The IMF stated in March 2021 that "building resilience to climate change and natural disasters would lower output volatility and boost growth," and advised the authorities to develop a comprehensive Disaster Resilience Strategy that includes insurance.
Belize repurchased its only international bond as part of its debt restructuring program, using $364 million in capital arranged by The Nature Conservancy and insured by the International Development Finance Corporation. This commitment enabled Belize to restructure approximately US$553 million in external commercial debt, representing 30% of the country's GDP, and to reduce the national debt by 12%.
The proceeds of a "blue bond" arranged by Credit Suisse are used to back the transaction. This includes prefunding a $24 million endowment to support future marine conservation projects, as well as Belize's commitment to protect 30 percent of its waters by 2026 and to contribute approximately $4 million annually to an independent domestic conservation fund.
The Willis Towers Watson placement is seen as a model for integrated protection for creditors and issuers as global development finance institutions consider incorporating climate risks into their mainstream sovereign loan programs. The parametric wrapper triggers benefits based on objective rather than subjective criteria, which provides comfort to creditors, and it pays upfront for debt servicing payment relief when disaster strikes, rather than simply extending the repayment schedule. The agreement also reinforces recommendations made in a new report from the Cambridge Institute for Sustainability Leadership, which was developed with input from financial regulators and policymakers, that climate insurance should be integrated with sovereign debt systems.
The placement is the latest result of Willis Towers Watson's Global Ecosystem Resilience Facility (GERF), which was launched in 2018 and has led to the protection of natural assets such as coral reefs, mangroves, and forests.
"Many coastal and island nations have three closely linked features: economic reliance on their valuable natural resources, higher exposure to the damaging effects of climate change, and unsustainable debt loads," said Kevin Bender, Senior Director of Sustainable Debt at The Nature Conservancy (TNC). To assist these nations in meeting their conservation funding needs, we must also address a complex web of financial risks. Willis Towers Watson's catastrophe wrapper for the Belize transaction is a brand new solution that fills a much-needed gap."
"Parametric insurance will be a powerful tool enabling borrowing countries hit by natural disasters to benefit from financial relief through a temporary waiver of debt service," said Michael Roth, Public Sector Practice Lead in Munich Re's Capital Partners team. Borrowing countries may improve access to, and terms and conditions of, debt finance by lowering the credit risk for sovereign lenders. In a novel way, the blue bond transaction combines nature conservation, risk reduction, sovereign financing, and risk transfer. We hope that the bespoke Blue Bond transaction is just the beginning of more environmentally oriented shock-resilient sovereign debt bonds and loans."
About the Climate and Resilience Hub
The Climate and Resilience Hub (CRH) serves as the focal point for our climate expertise and capabilities, bringing together knowledge from our people, risk, and capital businesses, as well as our collaborations, to deliver climate and resilience solutions in response to a variety of regulatory, investor, consumer, employee, and operating pressures. We provide analytics, advice, and transactions under the Climate QuantifiedTM brand to enable corporate, financial, and public sector institutions to embrace the climate decade ahead.