(Bloomberg) -- Bank of America Corp. is establishing itself as a repeat dealmaker in a nascent market that helps emerging economies refinance debt, and use any money saved on conservation.
In its second such transaction since arranging a debt swap for Gabon last year, BofA is now helping Ecuador buy back old debt, which will be done using new bonds that will also help cover the cost of a new loan. The deal, which also marks Ecuador’s second foray into the market, has already buoyed the country’s bonds.
Such transactions, known as debt-for-nature swaps, are gaining in popularity both among emerging markets and with global banks. Barbados, the Bahamas and El Salvador have all recently wrapped up similar deals. At the same time, the arrangements have drawn scrutiny for a lack of transparency and high costs.
Banks that have moved into the market for such swaps include JPMorgan Chase & Co. and Standard Chartered Plc. Credit Suisse, which was acquired last year by UBS Group AG, was the first to introduce private investors to the market back in 2021.
BofA is arranging the tender for four of Ecuador’s dollar-denominated notes. Those will be replaced with a new loan, with the whole transaction being financed through bonds issued by Amazon Conservation DAC, a special purpose vehicle based in Ireland, according to a statement posted on Tuesday.
Spokespeople for Ecuador’s finance ministry and BofA declined to comment.
Ecuador’s deal “should be bond price supportive,” said Ricardo Penfold, managing director at Seaport Global in New York. He expects the tender to prioritize the 6.9% bonds due 2030, because they have an expected partial amortization in 2026.
By Tuesday morning local time, Ecuador’s dollar bonds were leading gains in emerging markets.
For Ecuador, the deal is “part of a broader refinancing operation to channel savings and promote certain conservation and sustainability efforts,” Amazon Conservation DAC said in the statement.
The total debt-for-nature-swap market remains tiny in volume, at just a few billion dollars. But the transactions are being treated by bankers and environmentalists as a financial structure that has the potential to grow exponentially.
In October, six nonprofits agreed to construct a shared pipeline of deals that will be subject to common standards. The group, which includes the Nature Conservancy, Conservation International and WWF, says such swaps may unlock as much as $100 billion of climate and nature finance.
TNC said in a statement on Tuesday that it sees “great potential” for such deals. “We’re excited that there is a lot of interest in this approach.”
The arrangements typically take place when a country’s debt trades at a discount, and involve guarantees from public finance institutions that backstop lenders and reduce borrowing costs for vulnerable economies.
But some of the swaps are starting to attract criticism. Earlier this year, a group of nonprofits filed a complaint relating to Ecuador’s first debt-for-nature swap with the Inter-American Development Bank, which backstopped the transaction with an $85 million guarantee. The complaint focused on an alleged lack of transparency and consultation with local communities.
In response, IDB President Ilan Goldfajn has said the group takes such concerns seriously. The complaint will follow due procedure under the auspices of the group’s Independent Consultation and Investigation Mechanism (MICI), he said in October.
Goldfajn has said that IDB, which agreed to a $155 million guarantee for Ecuador last month, plans to ensure that there’s more “buy-in” from communities going forward.
And MICI said separately that agreements have now been struck between Ecuador, IDB and community representatives from the Galapagos islands, with the goal of improving transparency and governance.
Some third-party investors also are starting to treat the market with a bit more caution. Eric Pedersen, head of responsible investment at Nordea Asset Management, was a buyer of Ecuador’s first swap who ended up exiting in May as part of a broader reallocation. He said complaints “need to be thoroughly looked into.”
Investors in debt-for-nature swaps are “buying impact coupled with returns, and the credibility of the impact component is essential,” he said in October.
BofA was among parties laying the groundwork for a deal to help Ecuador manage its debt financing costs in exchange for a pledge to protect part of the Amazon rainforest, Bloomberg reported in September.
The current tender for Ecuador’s bonds is offering prices ranging between 47.5 and 73 cents on the dollar, depending on the specific bond deal. The tender expires on Dec. 10, while final settlement is expected Dec. 17, the statement said.
--With assistance from Colin Keatinge, Stephan Kueffner and Helene Durand.
(Adds reference to Barbados swap.)
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