The World Bank, via its lending arm the International Bank for Reconstruction and Development  (IBRD), has priced a nine-year US$225 million, principal-protected Amazon reforestation-linked bond.

This is the largest World Bank outcome bond ever priced and provides investors with a coupon that includes a fixed guaranteed component and a variable component linked to the generation of carbon removal units (CRUs) from reforestation projects in the Amazon rainforest regions of Brazil. 

It is the first bond linking investors’ financial return to the removal of carbon from the atmosphere, differing from past transactions linked to the sale of carbon credits from avoided emissions. 

Through the transaction, approximately US$36 million of capital, the World Bank says, is mobilized to support the reforestation activities of Mombak, a Brazil-based company. The company uses these funds to acquire or enter into partnerships with landowners in the Amazon rainforest to reforest the land with native tree species.

In addition to removing carbon, the reforestation enhances biodiversity and fosters socioeconomic development in local communities. The innovative use of CRUs in this outcome bond structure, the World Bank notes, introduces a new model for mobilizing private capital to support reforestation finance.

The bond is 100% principal protected with the US$225 million proceeds used to support the World Bank’s sustainable development activities globally. Investors in the bond will forego a portion of the ordinary coupon payments, with the equivalent amounts instead being provided, through a hedge transaction with HSBC, to support the financing of the Mombak projects.

The Mombak reforestation projects align to the World Bank’s priorities in the Amazon, it points out, and are not financed by IBRD lending. The generated CRUs will be purchased through an offtake agreement by a CRU offtaker. A portion of the revenue generated from this sale will be paid to bondholders in the form of CRU-linked interest, in addition to the minimum guaranteed coupon the World Bank will pay investors.

The bond offers investors a potential financial benefit compared with regular World Bank bonds of similar maturity if the projects and monetization of high-quality CRUs are generated as expected.

“Private investors are eager to connect their financial return to positive development outcomes in the Amazon region,” notes 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.” 

Greg Guyett, CEO of global banking and markets, HSBC, adds: “This innovative bond aims to support the reforestation of thousands of hectares of the Brazilian Amazon rainforest. It was a privilege for HSBC to structure the transaction and act as sole lead manager on the World Bank’s largest-ever outcome bond issuance to-date.”