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Green bonds lose momentum in LatAm as Q2 issuance sinks below $300M

Pure green bond issuance in Latin America plummeted to a three-year low in the second quarter due to greater risk aversion on global markets and a preference for other sustainable bonds by local players.

Environmental-focused debt operations during the period fell 88.7% year on year to $270 million according to the Climate Bonds Initiative, a U.K.-based company that tracks green debt globally. The total was also considerably below the $1.72 billion in funding secured in the previous quarter.

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There has been limited activity in other markets in the region. M&A deals have ticked downward, and capital offerings are scarce.

Latin America typically accounts for 3% of all global issuances in the market, a figure that has fallen below 1% this year with $2 billion issued to date. Europe remains the highest-contributing region to green debt globally, but its share of issuance dropped to 41.7% in the quarter from 54.8% a year ago.

Latin American credit risk rose in the second quarter as higher interest rates and looming political risk created a challenging outlook for regional economies. The cost of insurance against default rose in all of the region's major economies over the period, as measured by credit default swaps, or CDS.

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Chile, one of the most active sovereign issuers in the local green bond market, saw no issuances this quarter. Political uncertainty has seeped into markets in a country traditionally perceived by global investors as a safe haven in the region. CDS rose by 60.7% in the quarter as the country prepares to vote for a new constitution later this year.

During the first quarter, however, the country was able to break new ground by issuing $4 billion in a sovereign sustainability bond, another format across sustainable bonds in which proceeds are not applied to environmental projects alone but rather a combination of factors.

"Adverse global market conditions have hurt Latin America's labeled bond issuance," analysts from Bank of America wrote in a recent report. The investment bank stated that these bonds had fallen further than overall debt issuance in the region and that both sustainability and sustainability-linked bonds (two different types of instruments) have been the preferred vehicle for labeled bonds investors, more than green and social instruments.