The world is my oyster - the birth of blue bonds in Seychelles

The oceans are a fundamental organ of the planet’s ecosystem, and this so-called blue bond is a critical step in specifically recognizing the value of marine related projects

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The trend towards sustainable investing has resulted in the rapid growth of green bond issues, bonds that are intended to fund projects that have positive environmental and/or climate benefits. But sustainable investing is not just about environmental and climate projects.

Let's not forget the ocean covers more than 70% of the earth's surface, and 97% of our planet's water comes from the ocean, thus most of our planet is covered with marine life, natural resources which are sadly being polluted if not depleted. In fact, last week the body of a dead sperm whale, which had ingested over 1,000 pieces of plastic was found washed ashore in Indonesia.

Perhaps in a David-and-Goliath effort, the tiny island nation of Seychelles, quietly issued "blue bonds", a first-of-its-kind fixed income instrument designed specifically for funding marine-related projects.

"It's a bond designed to preserve and protect marine life in various facets. It means that the use and proceeds of the blue bonds are all directed towards the preservation of marine life. We've been working on this transaction for one and a half years. So, it's not something that happened overnight," says Rahul Sheth, executive director of Capital Solutions

Standard Chartered Bank, who was responsible for the structuring of the bonds.In terms of amount, the first ever "blue bond" issue is relatively small, valued at only US$15 million. However, it is quite significant since it provides a template by which fixed-income investors can tap opportunities for investing in marine life, derive a stream of income and protect the marine environment to boot.

In terms of structure, the Seychelles "blue bond" is relatively creative. Three institutional investors who all have sustainability mandates invested a total amount of US$15 million. These investors are Calvert Impact Capital as the lead investor, Nuveen Investments which is a subsidiary of the Teachers Insurance and Annuity Association, and US insurer Prudential Group.

"All the investors were involved from the beginning. The principal condition of the investors is that all the proceeds must be used for financing marine-related projects," Sheth says.

To ensure repayment, the structure of the Seychelles "blue bond" includes a principal guarantee from the World Bank (WB) amounting to US$5 million. In addition, a US$5 million loan is provided by the WB's Global Environment Facility to cover the interest and debt service payments in the unlikely event of a default.

Of the US$15 million proceeds from the "blue bond", US$3 million will be used for providing grants to fishermen that will allow them to purchase superior equipment designed to protect the marine environment.

The grants will be administered by the Seychelles Conservation and Climate Adaptation Trust.

The remaining US$12 million will be used for providing marine-related loans to small-and-medium-enterprises (SMEs) to be administered by the Development Bank of Seychelles.

In terms of yield and tenor, the "blue bond" has a 10-year tenor and eight-year amortization and pays an interest 6.5%.

When asked why it was necessary to structure blue bonds and whether green bonds could have served the same purpose, Sheth replies: "Blue bonds are focused on marine ecology, while, with green bonds, you could include 15 different varieties of assets. Green bonds cover the marine environment only a superficial level. If you read the green bond principles, they would just make a brief mention of this but they wouldn't go into the depths of what it contains or what it requires. Likewise, if you look at the climate bonds initiative taxonomy."

Date

3 Dec 2018

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