A Royal Visit Led This Indian Ocean Nation to Invent a New Bond

(Bloomberg) -- After Prince William and Kate Middleton honeymooned in the Seychelles in 2011, the former British colony enjoyed a tourism boom that’s made it one of the richest countries in Africa. But with success has come a new challenge for the nation of 90,000 people: High-income countries are no longer eligible for the international aid that helps developing states fight climate change.

And climate change is already a problem for tiny islands around the world. With its dependence on tourism and fishing, the Seychelles has more to lose than ever—from rising sea levels to worsening storms. So this archipelago of 115 islands located 1,000 miles northeast of Madagascar is enlisting private investors in the battle to save itself from global warming.

Seychelles this week issued a first-of-its-kind “blue bond” to benefit its marine resources, the government announced on Monday.

The $15 million, 10-year sovereign bond was sold in a private placement to three international investors, Nuveen, Prudential and Calvert Impact Capital. It also included participation from the World Bank and the Prince of Wales. Its colorful name is a play on the rapidly growing market for green bonds, or debt issues directed to specific environmental or sustainability goals.

“This is a test case to illustrate the impact that markets can have on the oceans,” said Gianfranco Bertozzi, lead financial officer for the World Bank Treasury. “If a country like the Seychelles—which is very far off the radar in the middle of the Indian Ocean—can do this, then this is something others can also do.”

The problem Seychelles and other tiny islands are facing is that their tax bases are too small to pay for saving oceans and marine ecosystems. They also can’t afford huge interest payments on debt that credit markets might consider risky.

Funding from the Prince of Wales’s International Sustainability Unit helped Seychelles start working on the concept of a blue bond in 2014, leading to the issue this week. The World Bank has provided a $5 million guarantee on the bond. Proceeds will fund two major initiatives: $3 million for conservation and climate grants and a $12 million investment fund to be managed by the Development Bank of the Seychelles.

The proceeds from the bond will help pay for marine protection, fishery management and other projects to safeguard the ocean economy the country depends on. Fish and related products make up about 95 percent of the total value of Seychelles exports, and the industry employs about 17 percent of the population—its second-biggest industry after tourism.

The bond “will greatly assist Seychelles in achieving a transition to sustainable fisheries and safeguarding our oceans,” said Vincent Meriton, vice president of the Republic of Seychelles, in a statement.

The investors who purchased the bond said they hoped blue bonds will find success similar to that of their green cousins, which are estimated to hit $200 billion in annual issuance this year.

“On one hand it’s a plain vanilla sovereign bond,” said Catherine Godschalk, who manages Calvert’s investments team, of the blue bond. “What’s different is it’s part of a broader program enabling the Seychelles to invest in and create infrastructure, regulatory policies and departments to conserve their natural resources in the ocean.”

The bond pays a 6.5 percent coupon. Interest payments are partially being funded by the Global Environment Facility, which reduced Seychelles’s payment to 2.8 percent.

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