Barbados issues first pandemic-protected bond, also covering natural disasters

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Barbados has issued the world’s first government bond with a clause allowing payments to be suspended in the event of a new global pandemic, a move expected to spark the interest of dozens of other countries devastated by the COVID-19 crisis.

The Caribbean has become something of a test region for sovereign debt innovation in recent years. In 2015, Grenada was the first to put a “hurricane clause” in one of its bonds, sparking a spate of simulated natural disasters.

Barbados’ new bond – finalized on Wednesday in a deal with bankers – is likely to leave an even bigger impression, especially with smaller tourism-dependent countries that were on the brink of economic collapse during the COVID-19 pandemic.

The bond, which is due to be repaid over the next 15 years, will be the first that will allow a government to suspend its payments if another outbreak similar to COVID-19 occurs. Payments can be suspended for up to two years at a time and twice if necessary, but cannot be canceled altogether.

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The country’s prime minister, Mia Mottley, believes that if this kind of option had been available in 2020 to many of the countries now in trouble, much of the financial turmoil could have been avoided.

“It would have unlocked just under a trillion dollars in the developing world,” Mottley told Reuters. “And that’s why we wouldn’t have to deal with the kind of debt crises that many countries face.”

Credit Suisse banker Ramzi Issa, who led some of the key financing aspects of the bond deal involving a buyback, said it was “hugely important”.

“It sounds like a simple concept, but it took quite a bit of time,” Issa said. “This is a very valuable tool for governments to use… will likely set a precedent for other sovereign financing.”

The clause also covers tropical storms, earthquakes and floods, but it is the pandemic element that is unique.

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‘Dose of Vaccine’

To be activated, the World Health Organization (WHO) would have to formally declare a pandemic, or in the words “public health emergency of international concern,” and Barbados itself would have to divert significant amounts of its resources.

Sovereign debt experts and bankers who have been closely involved during this crisis and others over the years say the bond is an important milestone for global credit markets.

“It’s like a dose of vaccine for your debt,” said Sui-Jim Ho, a partner at Cleary Gottlieb — the law firm that helped draft the clause for Barbados. “You put it in and it protects you if another pandemic hits.”

The bond deal also has an ecological aspect.

Credit guarantees from the Inter-American Development Bank and an organization called The Nature Conservancy (TNC) allow Barbados to borrow more cheaply, saving itself between $40 and $50 million compared to the replaced old bond.

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That money will be used specifically to protect and restore the surrounding Caribbean Sea, under the terms of the deal, making it a so-called “blue bond.”

Barbados’ marine area is 430 times larger than its land area, Mottley estimates, and the image of crystal-clear water lapping along palm-fringed beaches is crucial to tourism, which accounts for more than 40% of the country’s GDP and about 40% of the jobs.

“We are hopeful that others will follow,” said Slav Gachev, TNC’s general manager of sustainable debt, referring to Barbados that uses TNC and the Inter-American Development Bank as guarantors.

“We have a pretty robust pipeline of half a dozen opportunities and we’re hopeful that we’ll close two or three in the next 12 months.”

(Reporting by Marc Jones, editing by Huw Jones and Emelia Sithole-Matarise)

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Natural disasters COVID-19

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