World Bank, Amazon back R1bn Eastern Cape spekboom bond

The World Bank has teamed up with Amazon.com on a bond whose proceeds will go toward rehabilitating ecosystems in South Africa’s Eastern Cape Province.

The $120 million, 14-year bond sold to large institutional investors ties returns to carbon credits generated by restoring land degraded by centuries of overgrazing. Amazon has agreed to buy a “large share” of the credits, the World Bank said Thursday. In addition to the carbon-linked payments, the bond carries a 2.41% interest rate.

“Investors will expect to obtain a total return on the bond that will be higher than the yield of a typical World Bank bond,” Michael Bennett, head of market solutions and structured finance in the Treasury department of the Washington-based lender, said in an interview.

The deal marks the latest in a series of so-called outcome-based bonds sold by the World Bank, as it looks for ways to bring private investors into projects targeting biodiversity, sustainability and development needs.

Proceeds of the South Africa bond, the longest of its kind issued by the World Bank, will go toward restoring thickets of Spekboom, a plant that sequesters carbon and helps soil retain water. Spekboom, which has been decimated by South Africa’s goats, means “bacon tree” in Afrikaans, a reference to its plump, succulent leaves.

Including the Spekboom bond, the World Bank has raised $945 million through outcome-based bonds, with returns tied to projects ranging from boosting the Black rhino population to reforestation in the Amazon and reducing plastic waste in Ghana and Indonesia.

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The South Africa bond will pay an annual coupon comprised of an interest rate and an additional payment that will depend on income generated from the sale of carbon credits to Amazon, as well as the overall success of the project. A carbon credit represents a ton of climate-warming carbon dioxide or its equivalent removed or prevented from reaching the atmosphere. Companies like Amazon buy them to offset their own emissions.

BNP Paribas SA was the lead manager and bookrunner for the transaction. The project has been registered on the Verra carbon registry.

The project is operated by Imperative, a company that’s working to restore the Albany thicket, which is a 1.7 million hectare (4.2 million acre) expanse of succulent shrubs, including Spekboom, of which more than 80% has been degraded by overgrazing.

“It’s a very efficient plant for water retention and from a carbon-sequestration perspective,” Bennett said. “It can produce a relatively high level of carbon sequestration for the cost of putting it into the ground.”

Fashionable shrubs

In recent years, Spekboom shrubs have been marketed in South Africa as garden plants prized for their hardiness and carbon-absorbing qualities. In their natural environment, they reduce soil erosion and provide a canopy for other species to grow.

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The first phase of the project covers 10,000 hectares of land, with the bond intended to help finance a 50 000-hectare expansion. The land will be fenced to keep out goats, while still allowing native antelope to jump over and graze.

While the bulk of the bond’s proceeds will be used to finance the World Bank’s sustainable lending programs, $25 million will be directed to the Spekboom project as an upfront payment arranged through a hedge with BNP Paribas, the World Bank said.

Investors in the bond include Nuveen, a unit of the US’s TIAA, Impax Asset Management Plc, Mackenzie Investments, Metlife Investment Management, Alliance Bernstein Holding LP, Legal & General Group Plc, Skandia Investment Group and Morgan Stanley Investment Management.

“The general idea of outcome bonds is to get institutional investors taking risk on projects that — let’s say — they wouldn’t take risk on directly,” Bennett said. “We’ve hoped other people would follow because we think it is a valuable way to fund projects and a valuable use of the capital market. We know there are some other issuers working on transactions.”

Earlier this month, Johannesburg-based FirstRand sold a R2.5 billion ($152 million) bond that rewards investors on the rate of removal of invasive vegetation in the water catchment area supplying Cape Town. The invasive plants suck up excessive amounts of water.

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