(Bloomberg) -- Angola is considering a proposal from The Nature Conservancy for an environmental bond project that would reduce its debt burden.
Modeled after a similar initiative in Gabon, a so-called debt-for-nature swap has been under consideration but has not yet been formally accepted by Angola’s government, according to a spokesperson for the Ministry of Environment.
The Nature Conservancy, a US-based environmental nonprofit organization, has been active in Cuando-Cubango, an Angolan province that encompasses part of the Okavango Basin, in partnership with local and national bodies including the Ministry of Environment, the Ministry of Energy and Water, and the conservation organization ACADIR.
In a typical debt-for-nature swap, an international environmental group purchases sovereign debt on the secondary market at a steep discount, and then converts it into commitments from the debtor country for conservation. The Nature Conservancy has executed such deals in countries including Belize and Colombia. Its $500 million debt-for-nature swap in Gabon last year was Africa’s first.
A successful deal in Angola could start a “positive spiral” for performance of the nation’s debt, said Maciej Woznica, a fixed income portfolio manager at Coeli Frontier Markets.
With major debt payments due this and next year, “yields need to come inside 10% for them to access market,” Woznica said. A deal would be “a great win for nature, but also a major sign of support from the US for Angola.”
Debt Levels
Angola’s external debt stands at about 70% of its gross domestic product, according to S&P Global, making it one of the most-indebted nations in sub-Saharan Africa. The country’s reliance on loans from commercial creditors and China complicates traditional debt-relief efforts.
Earlier this month, Angola said it was considering selling eurobonds under favorable market conditions after several African countries came to market.
“Debt-for-nature swaps help countries reduce debt levels in a cost-effective way,” said Katrina Butt, senior economist at AllianceBernstein. They also provide an attractive opportunity for investors through insured or guaranteed financial instruments, she said.
The yield premium on Angola’s existing eurobonds over US Treasuries was 671 basis points as of Tuesday, according to JPMorgan Chase & Co. indexes, down from nearly 750 basis points on Aug. 5.
The recent rally in the bonds, if sustained into the likely first Federal Reserve interest rate cut in September, could open a window for the country to issue new debt in the fourth quarter, said Delphine Arrighi, senior portfolio manager at Enko Capital Management.
--With assistance from Monique Vanek.
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