Water security sits at the heart of El Salvador’s most ambitious sovereign liability management exercise to date, a landmark $1 billion debt-for-nature swap that combines balance sheet relief with long-term environmental remediation and earns the country the Sovereign Sustainable Deal of the Year award.

Completed in the final quarter of 2024, the transaction is the largest debt-for-nature swap ever executed and the first to place freshwater and watershed protection—rather than marine conservation—at its core. It targets the Lempa River basin, the backbone of El Salvador’s water system, supplying close to 70% of the country’s drinking water, powering five hydroelectric plants and sustaining a growing agricultural sector.

The scale of the transaction, the speed of execution and the structural complexity set it apart. From inception to closing, the deal was completed in roughly one year—an unusually compressed timeline for a transaction that required coordination across sovereign agencies, multilaterals, insurers, lenders and conservation organizations.

“This was a fantastic transaction from all angles. It involved coordination with many stakeholders, critical international support and was done in record time,” says Oscar Samour, a Salvadoran attorney with Consortium Legal who worked on the legal aspects of the deal.

At its core, the transaction was a refinancing. El Salvador issued $1 billion of 20-year impact notes to a special purpose vehicle, which used the proceeds of a $1 billion loan from JP Morgan to acquire the notes. The sovereign then deployed those proceeds to repurchase more than $1 billion of its outstanding international bonds through a concurrent tender offer, marking the country’s fourth debt buyback since 2022 and its most ambitious to date.

The structure allowed El Salvador to refinance existing debt on materially improved terms. Political risk insurance of $1 billion from the US International Development Finance Corporation and $200 million in standby letters of credit from CAF—Development Bank of Latin America and the Caribbean—provided powerful credit enhancement. That support lowered the cost of funding, enabling a coupon meaningfully below what prevailing commercial market conditions would otherwise have implied for the sovereign.

“This historic financing demonstrates that, through joint efforts, we can advance innovative financial mechanisms that accelerate sustainable development,” CAF executive president Sergio Díaz-Granados said in a statement.

The transaction is expected to generate more than $352 million in lifetime savings through immediate notional debt reduction and lower debt service costs. Of that amount, $350 million is contractually earmarked over 20 years for the conservation, mitigation and restoration of the Lempa River watershed, making it the largest conservation funding commitment ever embedded in a debt-for-nature swap.

Unlike earlier swaps in the Caribbean and Latin America, which focused on marine ecosystems, El Salvador’s deal pioneers a freshwater conservation model. The sovereign is required to establish a dedicated zonal authority to oversee watershed conservation, create a comprehensive water resources data monitoring system and designate 75,000 hectares of protected aquifer recharge zones by 2044—an ambitious commitment in a country covering just over 2 million hectares.

Funding flows are split between near-term project execution and long-term sustainability. Of the $350 million conservation allocation, $200 million will be deployed over 20 years into direct conservation and restoration projects managed through the Lempa River Conservation and Restoration Program. The program is overseen by Catholic Relief Services and El Salvador’s Environmental Investment Fund (FIAES), working alongside local and non-sovereign implementers.

The remaining $150 million will be channeled into an endowment fund, designed to accumulate capital and provide a permanent funding source for watershed protection beyond 2044, when the impact notes mature.

The transaction embeds unusually robust enforcement and incentive mechanisms. El Salvador faces step-ups in interest costs and monetary penalties if conservation commitments are breached, while compliance can trigger step-downs in the impact note interest rate. In extreme cases, certain failures could require mandatory redemption of the notes, with non-payment constituting an event of default. At the same time, the structure allows for cures, enabling penalties to be offset against future conservation obligations if breaches are remedied.

Structurally, the deal also breaks new ground by using a loan—rather than a bond—as the repackaging instrument, expanding the potential investor base beyond traditional bondholders. The structure required additional legal and financial engineering, including the use of an interest rate swap to reconcile the fixed-rate sovereign exposure with the floating-rate investor-facing loan, and careful documentation to avoid the standby facilities being classified as sovereign guarantees under Salvadoran constitutional law.

The transaction builds on a growing body of sovereign debt-for-nature swaps executed since 2021, including deals by Belize, Barbados, Ecuador and the Bahamas. But by combining record size, freshwater conservation, sophisticated compliance mechanisms and rapid execution, El Salvador’s swap sets a new benchmark for how sovereign liability management can be aligned with long-term climate resilience and environmental protection.

Republic of El Salvador $1 billion Debt-for-Nature Swap

Lender: JP Morgan

Guarantors: DFC; CAF

Paying and Administrative Agent: Bank of New York Mellon

Program Co-Managers: CRS; Environment Investment Fund of El Salvador (FIAES )

Counsel to Issuer: Consortium Legal; White & Case

Counsel to Lenders: Arias; Clifford Chance

Counsel to Program Co-Managers: A&O Shearman

Counsel to Guarantors: Mayer Brown; BLP, Norton Rose Fulbright