The World Bank has on Tuesday priced the largest outcome bond for Amazon reforestation – and the first to link investors' returns to the removal of carbon from the atmosphere.
The US$225m nine-year principal-protected deal will fund reforestation and tree-planting projects by Brazilian carbon removal startup Mombak using so-called carbon removal units to connect investors' financial returns to the project's outcomes.
The deal is the first in the World Bank's influential series of outcome bonds to support reforestation and the first to support the Amazon or any projects in Latin America. The innovative use of CRUs introduces a new model for mobilising private capital to support reforestation, the World Bank said.
“Private investors are eager to connect their financial return to positive development outcomes in the Amazon region," said Jorge Familiar, the World Bank's vice-president and treasurer. "With this largest ever outcome bond we continue to be encouraged by the growing interest in the structure as well as the expanded list of sectors supported.”
The deal is also a first for HSBC, which acted as structurer and sole lead manager.
"We've helped to open up the outcome bond market – we're proving that this can be scaled up significantly," said Asif Sherani, head of DCM syndicate for EMEA and public sector DCM at HSBC. "We should hopefully see more and more of these [deals]."
The World Bank has been issuing outcome bonds since 2021 in an effort to tackle a range of related environmental topics. This is its fifth such deal. Previous deals include a US$50m water purification project in Vietnam in February 2023 that linked to the sale of carbon credits from avoided emissions.
Deal structure
All of the deal's US$225m principal is protected and proceeds will be used to support the World Bank's sustainable development activities globally. The deal gives investors a coupon that includes a fixed guaranteed component and a variable component linked to the generation of CRUs from Amazon reforestation projects.
Investors will forgo some of the ordinary coupon payments, which will release US$36m to support Mombak's reforestation projects through a hedge transaction with HSBC, which means that Mombak is financed directly with private sector funding while the World Bank is facilitating the bond and a lower cost of capital thanks to its Triple A rating.
Mombak will use the money to buy land or partner with landowners to reforest degraded pastureland with native tree species. Its reforestation projects align to the World Bank’s priorities in the Amazon and are not financed by IBRD lending.
The CRUs will be purchased through an agreement with an offtaker. Microsoft signed one of the largest nature-based carbon removal offtake agreements globally in December with Mombak. The latter agreed to provide up to 1.5m carbon removal credits that Microsoft said was anticipated to remove 1.5m tons of carbon through reforestation.
In this instance, some of the revenue generated by selling the CRUs will be paid to bondholders as CRU-linked interest, along with the minimum guaranteed coupon from the World Bank. The CRUs will be verified by a third party linked to the offtaker, such as Verra or Gold Standard.
The bond could offer investors a premium compared to regular World Bank bonds of similar maturity if the projects generate and sell and high-quality CRUs as expected. If that outcome is achieved, the coupon will step up in 2028 and 2029 and there will be a further step-up between 2030 and maturity in July 2033, Sherani said.
The projected yield of 4.362% is higher than the 3.928% yield that a World Bank conventional US dollar bond with nine years remaining maturity is trading at today, according to LSEG data.
Bespoke pricing
Pricing was a bespoke process. "The risks associated with it are all very unique, so there isn't really an outcome bond curve you can look at. Even if there were other comparable bonds outstanding, by their very nature these are niche, structured products. The level of trading activity for these is extremely limited, if any," Sherani said.
Investors focused on a pickup relative to the World Bank's curve and how much that relates to the bond's risks. Risks include land acquisition and whether the trees planted will grow sufficiently to generate enough CRUs. Investors also have to become comfortable with the deal's coupon step-up mechanism.
Large asset managers and pension funds from the US and Europe made up a large portion of the bond's investor base, though it had global appeal. Sherani said the buyer base included some accounts that had never invested in an outcome bond.
Investors include Nuveen, which said that it is the largest investor in the transaction and T Rowe Price which described itself as a lead investor. Other investors include Mackenzie Investments, Rathbone Ethical Bond Fund and Rathbone Greenbank Global Sustainable Bond Fund and Denmark's Velliv Pension, a long-time supporter of World Bank outcome bonds.
There is considerable investor appetite to support the environmentally critical Amazon rainforest, which is likely to generate more ESG financing, including a potential use of proceeds for a sovereign jumbo deal for Brazil which is set to host the UN's COP30 meeting in 2025.