Nuveen and the Seychelles Blue Bond: Analyzing a Public Fixed Income Impact Investment

In 2016, Stephen M. Liberatore, CFA, lead portfolio manager for and head of Nuveen's impact fixed income strategies, received a phone call from the World Bank. The call was not unusual; in fact, Nuveen had collaborated with the World Bank in the past as lead investor on a new type of Green Bond for the World Bank's private sector arm, the International Finance Corporation (IFC). While Green Bonds had been in existence for nearly a decade, the IFC Forest Bond was the first government-related credit focused on channeling private funds toward forest protections. The call that day, however, centered around an entirely new concept-a Blue Bond. Like most fixed income products, Blue Bonds were a debt instrument providing capital to issuers who repaid the debt with interest over time; however, the use of proceeds was earmarked for marine projects and ocean conservation. While the Nuveen team was familiar with and open to the more esoteric transactions presented by the World Bank, they had a series of challenging tasks ahead of them. First and somewhat simultaneously, they had to assess the security on a total return basis incorporating, among other assessments, fundamental credit analysis, an evaluation of terms, liquidity analysis, and relative value analysis, while ensuring that the investment adhered to their impact framework. This included not only direct support of measurable social and environmental impact but an emphasis on competitive, risk-adjusted return potential. This was particularly challenging given that the issuance was the first of its kind and comparable securities did not exist. Additionally, measures of impact remained immature as this was an inaugural transaction, so determining impact targets was not feasible. The team also had to determine the size of their commitment. While they could have funded the entire deal, they wondered if it made more sense to incorporate other impact investors. Finally, the team had to ensure that that the investment and its targeted projects fit within the mandates of their diverse client base.