Dealflow | May 2, 2017

A private bond market emerges for low-income community development

The team at


If you need an example of how catalytic public and private impact capital can open private capital markets for low-income communities, consider the scene at The Reinvestment Fund in Philadelphia as bids came in last week for the organization’s $50 million in S&P-rated bonds, only the second such bond offering ever.

It was nervous-time. CEO Don Hinkle-Brown didn’t know what to expect in The Reinvestment Fund’s first dip into global capital markets. Then the bids started rolling in. The staff cheered and hugged as the issue was oversubscribed within minutes.

That anonymous private investors would buy unsubsidized bonds on the open market signals a new source of capital for childcare centers and charter schools, grocery stores and health clinics, energy efficiency upgrades and small businesses in low-income communities across the U.S.

“I have speculated and fantasized about real access to the capital markets for decades,” Hinkle-Brown told ImpactAlpha. “If there’s enough activity and we can build a marketplace, we can see whether people will pay for impact.”

Capital constraints

Reinvestment Fund is on the move. This year, the Philadelphia-based community development financial institution expects to finance 1.3 million in commercial square footage, capacity for an additional 175,000 patient visits, 600,000 new megawatt-hours of clean energy production and more.

The individual projects are targeted to benefit low-income communities located in at least 10 states plus the District of Columbia. And for the first time, bond market investors are coming along for the ride.

The $50 million in medium-term bonds sold last Thursday carried an AA- rating from S&P. Bank of America Merrill Lynch was the underwriter.

The Local Initiatives Support Corporation (LISC), another community development finance institution, or CDFI, with an AA rating from S&P, closed the first ever private-capital markets sale of CDFI bonds with a $100 million offering of longer-term bonds last week (see, “LISC offers first CDFI bond to bring private capital to low-income communities”). LISC received $130 million in orders on its offering.

“Accessing capital markets means CDFIs are here to stay,” says Mark Zandi, vice chair of Reinvestment Fund’s board of directors, whose day job is chief economist at Moody’s, another investment rating agency. “This also opens up the door to underserved communities having more access to the global capital markets.”

The two bond sales last week represent a new source of capital for the CDFI sector, which specializes in lending to community-based organizations and households in low-to-moderate income urban, rural and reservation communities. As a sector, CDFIs have around $108 billion in assets.

Offering its credit rating to the bond market at large “is a remarkably different execution than what we normally do, where we have to tap dance door-to-door to finicky investors who want very particular geographies and very particular transaction sets,” says Hinkle-Brown.

Bond market

The $39-trillion U.S. bond market is a new source of capital for CDFIs, which have typically raised capital from three sources: government or foundation grants; program-related investments (PRIs) from philanthropic foundations seeking specific health or education or job-creation outcomes; or short-term loans from banks motivated by their obligations under the Community Reinvestment Act (CRA).

CRA-motivated bank loans can carry specific geographic requirements — banks need CDFIs to make investments in low-and-moderate income census tracts within their market footprints. Bank of America has more than $1 billion in investments across more than 240 CDFIs around the country. Wells Fargo, JPMorgan Chase and Citigroup also have large and growing CDFI investment portfolios.

But, like conventional businesses and financial institutions before them, CDFIs need to diversify their sources of capital. “We increasingly feel capital constrained,” says Zandi.

There are no geographic or programmatic constraints on the CDFI bond proceeds. The terms available from capital markets are also longer than the typical terms on CRA-motivated loans or PRIs that CDFIs get from banks or foundations. Reinvestment Fund’s offering comprised six-, seven- and eight-year bonds. (LISC’s bonds matured in 10- and 20 years.)

The capital is affordable, too — Reinvestment Fund says the yield on their bonds at closing may be around 3–3.5 percent, around the mid-range of what they pay their fund’s existing investors.

The investors on both bond sales included insurance companies, which collectively hold $5.8 trillion in investments, $3.9 trillion of which is in the bond market.

Other big fish in the bond market include the $25 trillion in U.S. retirement assets, which includes $5.5 trillion in public sector pension funds and $14.9 trillion in employer-sponsored or individual retirement accounts.

Foundations, with $865 billion in estimated foundation assets are in the bond market, too, specifically the 95 percent of their endowments typically reserved for conventional stocks, bonds and other investments. As investment grade bonds like any other investment grade corporate bond, CDFI bonds satisfy fiduciary responsibilities for foundation endowment asset managers. At least one foundation ended up investing in Reinvestment Fund’s bond issuance. (Issuers are not at liberty to disclose buyers by name)

Reinvestment Fund says some retail investors were also able to get in on their bond sale, through broker-dealers.

The community development lender plans to spread its $50 million in bond proceeds across its portfolio. Its existing 2017 pipeline so far includes $102 million in loans across six asset classes — commercial enterprise, food commerce, education, housing, healthcare and community resources (e.g. arts and cultural centers, senior centers, homeless shelters). In many cases, the proceeds will finance leverage loans under federal New Markets Tax Credit transactions, which have a seven-year compliance period.

LISC plans to use a good chunk of their $100 million in bond proceeds for long-term loans, including those made to refinance and wind-down New Markets Tax Credit transactions at the end of their seven-years. Long-term, fully-amortizing loans can be hard to get for CDFI borrowers, which are often nonprofit community-based organizations.

Political Risk

“The jury is still out on whether this is a predictable source of capital,” Hinkle-Brown admits. “But if it becomes predictable and dependable, what it shows is efficiently priced capital from markets can actually work in community development.”

The emergence of the market will also provide a test of whether “impact,” in the form of measureable social progress in low-income communities. “For the first time, this wont’ be an anecdote,” Hinkle-Brown says. “We can watch the capital markets, and see whether impact is seen as miscellaneous, an impairment, or as added-value in the offering.”

For now, the market acceptance of the bond issue is at least a validation of borrowers in the low-to-moderate income urban, rural and reservation communities where CDFIs work. LISC was founded in 1979, and Reinvestment Fund in 1985. The three other CDFIs that also have investment-grade S&P ratings are Capital Impact Partners, founded in 1978; Clearinghouse CDFI, founded in 1996; and Housing Trust of Silicon Valley, founded in 1998. These organizations have weathered multiple recessions and multiple financial crises that hit low-income communities particularly hard.

The wild card? President Trump’s proposed budget, which zeroed out the CDFI Fund’s annual grant programs (which have been crucial for strengthening CDFIs to the point where some are now issuing bonds) and eliminates community development block grants (which often serve as underlying equity on projects that CDFIs finance). The proposed reduction of corporate tax rates will reduce demand for New Markets Tax Credits or Low Income Housing Tax Credits to offset such taxes. Those credits make many CDFI loans work.

Any one or combination of these changes could make future CDFI bond sales more difficult, if not impossible.

“I’m perplexed by it, I’m flummoxed,” says Zandi. “President Trump promised to help communities that CDFIs are helping every day. Cutting off the CDFI fund would make it difficult for CDFIs to serve the people the president says he wants to serve.”

It may sound strange, but Congress is coming to the rescue. CDFIs have had bipartisan support for years, and the budget bill congressional leadership proposed on Monday morning contains the largest appropriation ever for the CDFI Fund — $248 million.