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Credit Suisse was sole structurer on the Wildlife Conservation Bond, which will support black rhino conservation efforts. Edward Russell-Walling reports.

In a first-of-its-kind transaction, and after many years of preparation, the World Bank’s Wildlife Conservation Bond has raised $150m for sustainable development projects and around $10m which will go towards saving black rhinos in South Africa. That makes it the world’s first financial transaction dedicated to protecting a species. Credit Suisse was sole structurer and joint bookrunner (along with Citi) on what has inevitably become known as the ‘rhino bond’.

In 1972 there were an estimated 70,000 black rhinos in Africa, according to the UK-based conservation charity Save the Rhino International. By 1995, that had plunged to 2410 as a result of poachers killing the animal for its horns. Conservation efforts have brought the numbers back up to above 5000, but the black rhino remains a ‘critically endangered’ species.

Despite misconceptions, rhino horn is not made of ivory, but keratin — the main protein in vertebrate hair, nails and claws. While there is no credible scientific evidence of any medicinal value for the use of rhino horn, it remains highly prized in China and Vietnam as a cure for ailments such as gout and rheumatism.

Growing demand has inflated prices to a point where rhino horn is many times more valuable than ivory and, pound for pound, even gold. South-east Asian criminal syndicates have increased their poaching activities, paying impoverished members of local communities to help them find the animals.

Funding shortfall

Recent history suggests that critically endangered species can be brought back from the brink. The white rhino population, once reduced by poachers to around 150, has bounced back to 18,000 thanks to conservation efforts. But long-term funding to achieve this for black rhinos — and other animals — remains inadequate.

“There is an overall estimated conservation funding gap of $800bn a year,” points out Oliver Withers, biodiversity lead within Credit Suisse’s global sustainability unit. “And funding is usually short term, for one or two years, so you can’t do long-term strategic interventions.”

Funding also tends to be inflexible, Mr Withers adds, with grants ring-fenced to outputs like the number of rangers or Land Rovers. “But there is no guarantee that you get more rhinos,” he says.

Mr Withers notes that every protected area is treated according to the lowest common denominator. “Generally, valued sites with good management teams aren’t trusted any more than the less well-managed, and get no more flexibility on how to spend their grants,” he laments.

The impetus for addressing the funding shortfall with a rhino bond came from United for Wildlife. At that stage, a partnership between seven leading wildlife charities, including the Zoological Society of London (ZSL) and the Royal Foundation of the Duke and Duchess of Cambridge. In 2016, the Rhino Impact Investment (RII) project was launched with implementation led by ZSL, where Mr Withers was head of conservation finance and enterprise before joining Credit Suisse last year.

The RII’s task was to develop the world’s first outcomes-based (as opposed to output-based) finance mechanism for a single species and to choose the sites that would benefit. It chose the Addo Elephant National Park and the Great Fish River Nature Reserve, both in South Africa. “The RII team did much hard work collecting scientific evidence on how to achieve the conservation goals and how much money would be needed,” says Julie Edinburgh, a managing director responsible for private placement business in Credit Suisse’s debt capital markets (DCM) syndicate. “Then in November 2020 Credit Suisse was asked to structure a bond.”

Credit Suisse already had a high profile in conservation — it hosted its ninth annual Conservation Finance Conference earlier this year. In November 2021, it was sole structurer and arranger of the Nature Conservancy’s largest-ever Blue Bond for Conservation. The bond raised $364m to help Belize restructure its external debt, while including $23.5m to fund protection of the country’s marine ecosystems over the next 20 years.

“Lots of people do reports on biodiversity,” Mr Withers says. “Very few do transactions.”

The bank also had an existing relationship with ZSL, after being technical advisor to the ZSL’s Sustainability Policy Transparency Toolkit for the palm oil and timber and pulp sectors for several years.

The social impact bond, where the donor pays when results are delivered, was the most obvious model to follow. In the case of the rhino bond, investors forgo their coupon. Instead, the World Bank — in the shape of the International Bank for Reconstruction and Development — pays its cost of funding to the two South African game parks to fund rhino conservation.

“The funding cost for the World Bank is the same as one of their conventional sustainable development bonds,” says Michael McCormick, head of Europe, the Middle East and Africa DCM advisory at Credit Suisse. “It was crucial having them as the issuer, because it took credit risk off the table. They also have extensive experience in managing grants, so the market can rely on their infrastructure to monitor how the money is used.”

Instead of a coupon, investors are rewarded with a success payment at the end of the investment period, depending on the growth in the rhino population. However, this presented certain challenges. Most impact bonds aim to increase a target metric, such as the number of prisoners who do not return to prison in a given period.

“You measure the baseline, then measure again at the end of the investment period,” Mr Withers explains. “In most cases, it’s unlikely that the target group regresses. But biodiversity has an asymmetric return profile.” This means that while the number of black rhinos could grow during the investment period, they could also all be lost to poachers. According to the classic social impact model, therefore, investors would risk losing their principal.

“Investors’ capital had to be protected, or not many would be prepared to invest,” Ms Edinburgh notes. “The problem was that when we started to look at the structure, interest rates were so low that the deal size would have to be enormous to justify the coupon income of ZAR152m ($9.5m) required for the parks. So we considered doing two tranches, one with ZAR as the notional currency.”

Why the black rhino?

When investors wanted to hear why the black rhino had been chosen, the team explained their endangered status and how this also put the health of the ecosystem below them at risk. They were able to provide clear evidence that rhino numbers could indeed be increased and that any increase was not only achievable, but measurable.

Key to this is the inclusion of a rhino population growth-rate calculation agent, Conservation Alpha — a South African team of conservation specialists. Every black rhino has a unique identifying notch pattern cut into its ear, which allows Conservation Alpha to track and photograph them. “They may not see every rhino in the reporting period, but they can work out the statistical probability of their survival,” Mr Withers says.

Conservation Alpha’s judgment is key to the whole process. “Their valuation after five years determines what the investor gets paid,” Ms Edinburgh says.

While the practicalities of measurement were taken care of, the team was still working on the structure of the bond itself when interest rates began rising at the end of 2021. “We were looking at doing the bond and coupons both denominated in South African rand with the success payment in US dollars, but investors found it difficult to book that in their systems,” says Shrey Ginoria, a director on Credit Suisse’s private placements medium-term note desk. “So, we tried to find ways to do it all in dollars and the interest rate move helped a lot.”

Ms Edinburgh agrees, saying that it was a game changer. “Interest rates rose so quickly, we had to make a decision on the structure,” she says. “The bond would now generate more income than the parks needed, so did we pay more to them or give the excess return back to investors?” Much in-depth client feedback was generated. “We could also have changed the principal amount, but we were happy to have at least one variable locked down,” says Mr McCormick.

Instead, it was decided to issue the five-year bond at a price below par — at 94.84%. “That gives investors a minimum return of 1%, irrespective of rhino numbers, which allowed more to participate,” Mr Ginoria says.

The maximum success payment is $13.76m, payable if growth is above 4% and representing a return of 2.85%. If there is no growth, there is no payment, with 40% of the maximum paid for growth up to 2% and 80% for growth between 2% and 4%. “This model provides a new blueprint for the way conservation is financed,” Mr Withers maintains. “We hope it can be replicated across other geographies for various species.

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