Credit Suisse and Bank of America Under Scrutiny Over Debt Swaps to Emerging Market Issuers

In the world of global finance, scrutiny and investigations are nothing new, but recent developments have brought two major financial institutions, Credit Suisse and Bank of America, under the spotlight. The focus of this investigation? Alleged misconduct in the realm of debt swaps involving emerging market issuers. These allegations, reported by Bloomberg, have raised questions about the conduct of these banks and their commitment to ethical practices in the financial industry.

The Controversy Unveiled

The controversy surrounding Credit Suisse (UBS) and Bank of America (BAC) centers on their involvement in debt swaps with emerging market (EM) issuers after the global standard setter in debt markets the International Capital Market Association (ICMA) issued new labelling guidelines. Over the past few years, bonds were sold to finance debt-for-nature-swaps which is a way to reduce a country’s debt burden in exchange for guaranteed finance for nature.

However, it is alleged that in this case, Credit Suisse and Bank of America may have engaged in these swaps under questionable circumstances. The banks engaged in these swaps in exchange for marine conservation pledges and labelled these bonds as “blue” bonds. To determine what constitutes a green or blue label, a bond issuer must put all the proceeds generated through a sale towards environmental (green) or maritime (blue) goals, according to ICMA. However, the bonds were sold prior to the ICMA defined set and clear standards related to the labeling of these instruments.

Over $1bn in debt for Belize, Barbados and Gabon was refinanced over the past few years as a blue bond program developed by US non-profit The Nature Conservancy (TNC). For each of these cases, the refinancing was covered from the sale proceeds of the bonds, however documents from the deals illustrate the lack of funds that contributed to marine conservation.

The wider market for sustainable debt is estimated at ~$3Tn by the ICMA which encompasses “environmental bonds” (green) and “maritime bonds” (blue). Blue bonds remain unregulated, and the blue bond label is being generously used in these instances which puts participants in these transactions at greater risk for being tied to greenwashing. Banks such as Barclays (BCS) and Citigroup (C) have announced interest in arranging debt-for-nature-swaps. However, as these allegations bring BAC and CS under scrutiny, many investors are treating these instruments with more caution as the new ICMA labeling guidelines have been established.