2026 Perspectives for the Public Sector

The modern debt conversion is predominantly an intermediated commercial debt buy-back, often involving sovereign international bonds or other traded commercial debt. Sovereigns obtain financing in favorable terms to repurchase expensive debt trading in the market, in return for a credible commitment to invest part of the liability management savings in development outcomes. Favorable financing terms are enabled by credit enhancement from investment grade MDBs and/or other private insurance providers. Eight transactions executed since 2021 have bought-back almost $6 billion of outstanding commercial debt in the market and freed up close to $2 billion for environmental conservation and development. 1 However, these transactions involve a multi-party collaboration model that brings together sovereigns, commercial debt holders, NGOs, investment banks, institutional investors, MDBs, project implementors and legal advisors. This intricate web of participants and financial instruments underscores the need for profound expertise across various domains. Innovations in the Recent Wave of Debt Conversions (Post-2021) Since the Belize debt-for-nature conversion in 2021, incremental innovation has taken place to make the structure more efficient and maximize debt sustainability benefits and resources going to development projects. Some of these innovations include: (i) Broader Applicability Beyond Environmental Conservation Debt conversions are increasingly being used to address a wider variety of strategic priorities. While debt-for-nature conversions addressing marine and terrestrial conservation constituted the bulk of recent transactions, the framework has proven adaptable to address broader development and strategic challenges. The 2024 Barbados debt conversion , 2 the first debt-for-climate operation in the world, stands as a prime example. This transaction was structured with the support of the Inter-American Development Bank (IDB) and the European Investment Bank to fund investments in critical climate resilience infrastructure, such as water and sewage systems, directly addressing climate change impacts on water and food security. This innovation opens a vast new frontier for debt conversions, allowing sovereigns to tackle a wider array of strategic and development goals beyond the traditional conservation focus, demonstrating the flexibility and evolving sophistication of these financial mechanisms. (ii) NewCredit Enhancers Incrementally Entering the Market The increasing appetite for these transactions has attracted a broader array of credit enhancers, further diversifying the risk mitigation landscape. Historically, institutions like the US International Development Finance Corporation (DFC) and IDB have played crucial roles. However, other players are entering the market, bringing additional capacity and innovative approaches: • CAF (Development Bank of Latin America): 3 As a regional development bank, CAF’s participation in the debt conversion for El Salvador signals a growing regionalization of support for these instruments. Their involvement can facilitate deals within Latin America, leveraging local knowledge and relationships. • European Investment Bank (EIB): The EIB’s engagement, often alongside other MDBs, underscores the growing European commitment to climate finance and sustainable development in emerging markets. Their expertise and financial heft add significant credibility and capacity to European-backed initiatives. 4 • AXA (and other private insurers): The participation of private insurance like AXA, as seen in the Bahamas debt conversion, 5 marks a critical step towards mainstreaming the insurance component of these transactions. Private sector insurers bring substantial risk-bearing capacity and a market-driven approach to pricing and structuring, which can complement the roles of public DFIs and MDBs. The incremental entry of new credit enhancers signifies a maturing market, distributing risk across a wider base and potentially leading to more competitive terms and greater scalability. (iii) A NewApproach: The World Bank Debt Conversion Framework Another welcomed addition in this space is the debt conversion framework developed jointly by the World Bank and the International Monetary Fund, which aims to deploy a newmodel that reduces transaction costs by channeling resources to existing World Bank projects that already have financial management, monitoring and reporting mechanisms in place. 6 In this line, the 2024 Côte d’Ivoire debt conversion , the first transaction under the newmodel, amplifies the impact of an ongoing Project for Results operation in the education sector through the additional resources generated by the debt conversion, while leveraging the results framework, monitoring, reporting and financial management systems of the existing operation. 1 Debt-for-Nature Swaps: Conservation Collateralized, Bloomberg New Energy Finance 2 Barbados Launched the World’s First Debt-for-Climate-Resilience Operation, IDB 3 Debt swap for the Lempa River, a milestone and model for the world, CAF 4 Barbados launched the world’s first debt-for-climate-resilience operation, EIB 5 Debt Conservation Project enables The Bahamas to effectively manage its marine protected areas, AXA XL 6 Debt for Development Swap: An Approach Framework, World Bank Group 20 HowDebt Conversions are Evolving with the Times