Sovereign debt swap transactions have gained ground as an important financing tool for emerging markets. These transactions refinance all or a portion of a country’s expensive debt (typically trading at a discount) at a lower interest rate (through the benefit of external credit support) in return for a commitment to spend all or part of the debt service savings on identified high-impact development projects or initiatives, such as forest or marine conservation, climate action, education, public health, nutrition, or the support to refugees.
First seen in a nascent form in the 1980s in Latin America and on a bilateral basis, and then through the Debt Reduction-Development Contracts (C2D) which France began to implement in 1996 via the Agence Française de Développement1, the first “modern” debt swap structure emerged in 1993 between El Salvador and the U.S. Unable to service its external debt, El Salvador’s debt was reduced in exchange for a commitment to set up a conservation fund for natural resources which was managed by both El Salvador and the U.S. Since then, the conservation fund has been able to invest more than $90mn in the conservation and restoration of coastal marine and terrestrial ecosystems2.
No less than six sovereign debt swap transactions hit the markets last year or in the early days of 2025, with El Salvador, Ecuador, Barbados, the Bahamas, Côte d’Ivoire and Benin following similar deals closed by Gabon, Barbados, Belize, and the Seychelles in 20233.
Size of Sovereign Debt Deals in Select African Countries
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Sovereign debt swap transactions have gained ground as an important financing tool for emerging markets. These transactions refinance all or a portion of a country’s expensive debt (typically trading at a discount) at a lower interest rate (through the benefit of external credit support) in return for a commitment to spend all or part of the debt service savings on identified high-impact development projects or initiatives, such as forest or marine conservation, climate action, education, public health, nutrition, or the support to refugees.
First seen in a nascent form in the 1980s in Latin America and on a bilateral basis, and then through the Debt Reduction-Development Contracts (C2D) which France began to implement in 1996 via the Agence Française de Développement1, the first “modern” debt swap structure emerged in 1993 between El Salvador and the U.S. Unable to service its external debt, El Salvador’s debt was reduced in exchange for a commitment to set up a conservation fund for natural resources which was managed by both El Salvador and the U.S. Since then, the conservation fund has been able to invest more than $90mn in the conservation and restoration of coastal marine and terrestrial ecosystems2.
No less than six sovereign debt swap transactions hit the markets last year or in the early days of 2025, with El Salvador, Ecuador, Barbados, the Bahamas, Côte d’Ivoire and Benin following similar deals closed by Gabon, Barbados, Belize, and the Seychelles in 20233.
Size of Sovereign Debt Deals in Select African Countries
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Initial Debt Swap Transaction Structures
In a debt swap, a country’s existing commercial debt is prepaid or bought back via a tender offer, which is funded by debt at a lower rate often provided by a special purpose vehicle (SPV) and benefitting from a credit enhancement instrument in exchange for the country’s commitment to fund environmental or social projects.
The Seychelles was the first sovereign to issue a debt-for-nature instrument, doing so in 2016 with a $21.4mn debt-for-nature swap and again in 2018 with a $15mn blue bond. The structures for both were fairly simple – the blue bond, for example, has a partial guarantee from the World Bank – but they helped prove that this kind of structure was feasible and replicable over time4. The deal was replicated in November 2021 by Belize which bought back the government’s total commercial debt of $553mn at 55 cents on the dollar. This was financed with a $364mn blue bond guaranteed by the U.S. International Development Finance Corporation (DFC). In return, Belize agreed to spend $4mn a year on marine conservation until 2041, double its marine-protection parks to 30% by 2026, and set up an endowment fund to finance conservation after 20405.
Although the abovementioned debt swaps had broadly similar structures, Barbados went down a different route. In November 2024, it decided to use a sustainability linked loan backed by a $300mn-guarantees from the Inter-American Development Bank (IDB) and the European Investment Bank (EIB)6. Barbados intends to use the $125mn savings to finance water and sewage projects that are resilient to climate change7.
Evolving Debt Swap Transaction Structures in Africa
It is in Africa that the structure and size of these debt swap transactions are evolving. As noted, the first sovereign in Africa to emerge with a debt swap was the Seychelles in November 2018. Comparatively small – only $15mn – its so-called Blue Bond was developed to protect the ocean and has been used as a reference point for debt swap transactions ever since.
The 10-year 6.5% bond which was placed with three investors benefitted from a $5mn guarantee from the World Bank, alongside a $5mn concessional loan from the Global Environment Facility which helped reduce interest payments to 2.8%8.
The bond has had an impact in a number of ways. First, it has secured private sector financing to help attract further public-private sector partnerships or investments that benefit the blue economy sector. Second, it has raised awareness on the critical role of ocean and marine resources and the overall global need for environmental protection. But most important of all, it has preserved the livelihood of the Seychellois people9.
The $500mn amortizing blue bond due 2038 with a yield of 6.097% and a 10-year weighted average life was used to fund the buyback of some of the country’s debt via a tender offer, thus freeing up $125mn of funding for ocean conservation10. The debt was issued via an SPV and guaranteed by the U.S. DFC, which helped it secure an Aa2 rating from Moody’s. Money saved in the deal served for biodiversity protection in 20 offshore areas covering more than 25% of Gabon’s ocean territory11. Since then, Gabon has won plaudits for making progress on the marine planning process to decide which areas of the ocean should be protected, alongside monitoring of unregulated fishing12.
Nominal Debt Restructured Through Debt-for-Nature Swaps
*A proportion of Seychelles' debt was restructured in 2016 to fund marine conservation but financed through philanthropy, not bond insurances.
Source: The Nature Conservancy, Credit Suisse
At the end of 2024, the debt swap structure was developed even further by Côte d’Ivoire and Benin in cooperation with the World Bank. Both transactions differ from other recent debt swaps in various innovative ways, including the recourse to mechanisms avoiding the type of costly structures found in traditional debt-for-nature swaps, i.e., offshore special-purposes vehicles and trust funds that often incur significant transaction, administrative, and financial costs13.
Côte d’Ivoire worked with the World Bank to target nearly €400mn ($420mn) of commercial debt in a debt-for-development swap transaction14. The transaction benefited from a partial policy-based guarantee provided by the World Bank for an amount of up to €240mn. The transaction, which closed in early 2025, targeted some of Côte d’Ivoire’s most expensive outstanding commercial debt and was designed to improve its debt profile and fiscal position. According to the World Bank, the transaction will help free up around €330mn in public funds over the next five years and generate net savings of at least €60mn for Côte d’Ivoire by replacing expensive existing debt with a loan with a lower interest rate, a longer maturity, and a grace period15. Côte d’Ivoire intends to use part of the net savings generated toward the World Bank Program-for-Results “Strengthening Primary Education System Operation” projects and any other World Bank-supported priority development projects in the field of human capital, specifically in education, expected to yield significant social benefits16.
Around the same time, Benin entered into a €500mn debt-for-development swap benefitting from a partial policy-based guarantee provided by the International Development Association (IDA) for an amount of up to €200mn. Benin repurchased a portion of its 2032 Eurobond with the facility proceeds, allowing it to reduce its debt service costs while extending its average maturity, and allocated part of the debt savings towards SDG projects.
It is worth noting that both deals used the approach recommended by the IMF/World Bank in August last year, making them less transaction-heavy and more sustainable17. These transactions offer African sovereigns, not only a credible alternative source of cheaper funding, but a real impact on local development.
Maturing Market
Following the COP28 United Nations Climate Change Conference in Dubai in 2023, a consortium of multilateral development banks and climate funds launched a global task force to help standardize debt swap transaction structures18.
Initially led by the Inter-American Development Bank (IDB) and the U.S. International Development Finance Corporation (DFC), the group has also been joined by the Asian Development Bank, the African Development Bank, Agence Française de Développement, and the European Investment Bank, as well as the Green Climate Fund and the Global Environment Facility.
The aim is both to standardize and to speed up transactions – the Ecuador deal, for example, took four years to complete from inception. Above all what the consortium is aiming to do is to increase both the transparency on the terms of the debt swaps and the impact that such transactions make in tackling debt sustainability related issues. This clarity will, they hope, make for a smoother issuance process19.
According to the International Institute for Environment and Development, a standardized approach will “deliver debt relief at scale, lower transaction costs, and take a more comprehensive approach to addressing the debtor’s debt challenges”20.
Maturing Market
Following the COP28 United Nations Climate Change Conference in Dubai in 2023, a consortium of multilateral development banks and climate funds launched a global task force to help standardize debt swap transaction structures18.
Initially led by the Inter-American Development Bank (IDB) and the U.S. International Development Finance Corporation (DFC), the group has also been joined by the Asian Development Bank, the African Development Bank, Agence Française de Développement, and the European Investment Bank, as well as the Green Climate Fund and the Global Environment Facility.
The aim is both to standardize and to speed up transactions – the Ecuador deal, for example, took four years to complete from inception. Above all what the consortium is aiming to do is to increase both the transparency on the terms of the debt swaps and the impact that such transactions make in tackling debt sustainability related issues. This clarity will, they hope, make for a smoother issuance process19.
According to the International Institute for Environment and Development, a standardized approach will “deliver debt relief at scale, lower transaction costs, and take a more comprehensive approach to addressing the debtor’s debt challenges”20.
Outlook for Debt Swap Transactions
Some have argued that debt swap structures might not be the transformative solution many think they are. The Washington-based think tank the Center for Global Development, for example, has argued that they detract attention from the notable lack of progress and ambition in tackling either the climate crisis or the debt crisis21.
Nonetheless, while not intended to be a miracle recipe for debt sustainability and development, at their best, debt swap transactions can be a credible instrument in the fight to reduce the debt burdens of countries in Africa. This mechanism can help African sovereigns not only mobilize finance at competitive costs to close the climate and conservation funding gap, but also free up resources for investment in key areas such as education, health, and social and economic infrastructure.
Source: ONE Campaign
The money is urgently needed. A report from the African Development Bank estimated that by 2020, Sub-Saharan African external debt had almost doubled in eight years from $380.9bn in 2012 to $702.4bn22. Increased pressure to service significant amount of expensive public debt will inevitably further reduce fiscal space and funding that could otherwise be invested in achieving the Sustainable Development Goals and improving natural resource management. This ultimately increases the funding gap for nature conservation and improvement of the living conditions of the populations and these countries’ climate change mitigation and adaption efforts23.
The money is also certainly there. Despite the possible withdrawal of the U.S. from the international cooperation and development stage, other sources of funding are emerging like multilateral development banks and new deals are expected in the market.
Crucially they need to be managed properly. The World Bank has outlined three ways to make sure that debt swaps work effectively24. First, financial support must be used efficiently. Because debt swaps typically use some form of credit enhancement to reduce the cost of the new debt, such as a guarantee or a concessional loan, there needs to be a proper analysis of the costs and benefits of the swap to make sure that the deal stacks up. Second, detailed planning and oversight are crucial. As the World Bank says: “Funded projects must align with national priorities, and transparency is critical to ensure they are properly managed”25. The country must make sure that debt and public financial management systems are in place both to keep track of the financial flows and, just as importantly, to monitor project progress. Finally, the debt swaps need to be anchored in the country’s debt sustainability analysis and broader debt management strategy. “The swap should be integrated into a comprehensive debt management plan to ease financial pressure while advancing key development goals,” the World Bank notes26.
With new deals on the horizon and with proper management and oversight in place, there is little doubt that debt swaps will continue to evolve as a credible and sustainable alternative funding source for African sovereigns with real on-the-ground development impact for the populations.
The money is urgently needed. A report from the African Development Bank estimated that by 2020, Sub-Saharan African external debt had almost doubled in eight years from $380.9bn in 2012 to $702.4bn22. Increased pressure to service significant amount of expensive public debt will inevitably further reduce fiscal space and funding that could otherwise be invested in achieving the Sustainable Development Goals and improving natural resource management. This ultimately increases the funding gap for nature conservation and improvement of the living conditions of the populations and these countries’ climate change mitigation and adaption efforts23.
The money is also certainly there. Despite the possible withdrawal of the U.S. from the international cooperation and development stage, other sources of funding are emerging like multilateral development banks and new deals are expected in the market.
Crucially they need to be managed properly. The World Bank has outlined three ways to make sure that debt swaps work effectively24. First, financial support must be used efficiently. Because debt swaps typically use some form of credit enhancement to reduce the cost of the new debt, such as a guarantee or a concessional loan, there needs to be a proper analysis of the costs and benefits of the swap to make sure that the deal stacks up. Second, detailed planning and oversight are crucial. As the World Bank says: “Funded projects must align with national priorities, and transparency is critical to ensure they are properly managed”25. The country must make sure that debt and public financial management systems are in place both to keep track of the financial flows and, just as importantly, to monitor project progress. Finally, the debt swaps need to be anchored in the country’s debt sustainability analysis and broader debt management strategy. “The swap should be integrated into a comprehensive debt management plan to ease financial pressure while advancing key development goals,” the World Bank notes26.
With new deals on the horizon and with proper management and oversight in place, there is little doubt that debt swaps will continue to evolve as a credible and sustainable alternative funding source for African sovereigns with real on-the-ground development impact for the populations.
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