Debt swap for the Lempa River, a milestone and model for the world

The Lempa River, the axis of one of the most important river systems in Central America, originates in Guatemala and then has a short course through Honduras, but 360 of its more than 422 kilometers run through the mountains and plains of El Salvador before flowing into the Pacific Ocean. With its ecosystems of forests and wetlands with a rich diversity of flora and fauna, the basin covers almost half of El Salvador's territory and articulates its economy.

The Lempa supplies drinking water to 68% of the country, including part of the San Salvador metropolitan area, and is also the main source of hydropower. However, its conservation is threatened by pollution from untreated sewage and agrochemicals, as well as illegal logging and uncontrolled expansion of the agricultural frontier. Climate change phenomena, such as prolonged droughts or heavy rains, aggravate the watershed's environmental problems.

In order to find resources to develop an action plan to ensure its sustainability, the Salvadoran government and several international institutions, including CAF, Development Bank of Latin America and the Caribbean, concluded a historic transaction last October: the largest debt-for-nature swap ever agreed upon.

With the US$1 billion deal, facilitated by JP Morgan and backed by the U.S. Development Finance Corporation (DFC) and CAF, El Salvador will refinance US$1.031 billion in existing bonds at lower rates.

In the agreement, JPMorgan Chase Bank, N.A. acted as sole arranger of the loan, while JPMorgan Securities LLC (a limited liability company) acted as dealer manager for the repurchase of the bonds. DFC provided the $1 billion in political risk insurance (PRI), while CAF provided a standby letter of credit (SBLC) of $200 million. These two elements strengthen the credit risk underpinning the transaction, which had private fund ArtCap Strategies as financial advisor and global coordinator.

The destination of the savings

Over the maturity of the debt, the Central American country will obtain more than US$352 million through a combination of immediate nominal savings and substantial reductions in debt service costs. The AAA rating of the backing entities, with strong capacity to meet their financial obligations, is what allows for substantially lower interest rates.

Almost all of the aforementioned amount, $350 million, will be allocated to the Lempa River Conservation and Restoration Program, to be implemented over the next 20 years. Approximately $200 million, or an average of $9.75 million per year for 20 years, will directly finance the program, and the remaining $150 million, in installments of $7 million per year, will feed a trust fund intended to be a source of financing for the program beyond 2044.

These resources will be used to implement initiatives to improve water quality and quantity, restore ecosystems, protect biodiversity, and strengthen climate resilience. The Salvadoran government has also committed to declaring 75,000 hectares as protected areas, creating a water resource monitoring system, and developing a National Integrated Water Resources Plan.

El Salvador's President Nayib Bukele described the initiative as "the most ambitious environmental action in the country's history". The funding also provides for the distribution of grants to local organizations to promote biodiversity conservation, regenerative agriculture, and water security. The first grants are expected to be awarded this year.

Green Bank Commitment

The Lempa River Conservation and Restoration Program will be managed by Catholic Relief Services (CRS), the international humanitarian agency of the U.S. Catholic community, in conjunction with the Environmental Investment Fund of El Salvador (FIAES).

A seven-member board of directors, comprised of representatives of the Government of El Salvador, the U.S. Agency for International Development (USAID), and nongovernmental organizations, will oversee the implementation of the initiatives.

CAF, as part of its commitment to become the green bank of Latin America and the Caribbean, will invest US$25 billion by 2026 to finance environmental, climate change and biodiversity initiatives such as the one in El Salvador.
"This historic financing demonstrates that, through joint efforts, we can advance innovative financial mechanisms that accelerate sustainable development," said CAF Executive President Sergio Díaz-Granados, who also underscored the pioneering nature of the transaction by combining the conservation of critical resources with improved debt conditions. There is a new alternative to address the financial and environmental challenges of developing countries.