Community Development Financial Institutions (CDFIs) are always in need of capital to invest in their target markets, to grow their balance sheets, and to remain financially viable. Potential sources of capital include philanthropy, financial institutions, private investors, and government programs. One relatively new source of capital is the CDFI Fund’s Bond Guarantee Program (BG Program). Created through the Small Business Jobs Act of 2010 (P.L. 111-240), the BG Program offers CDFIs access to long-term, low-cost capital that can be invested in distressed and underserved communities.
CDFIs that have gained access to the BG Program know that the process is not a walk in the park, but the resulting debt maturities of up to 29.5 years, priced at a small spread over treasury rates, can be well worth the effort. The BG Program enables CDFIs to finance mission-driven projects of various types and sizes including small businesses, commercial real estate, affordable housing, charter schools, daycare or healthcare centers, and infrastructure, among others.
Unlike other CDFI Fund programs, the BG Program provides loans as opposed to grants. Bonds issued through the BG Program must be repaid to the federal government.[1] Because Congress has not funded a loan loss reserve for the BG Program, the tolerance for risk is very low. CDFIs applying to the program undergo a meticulous underwriting and financial screening that verifies their financial soundness and ability to repay the debt. The information collected in the BG Program application is used to determine CDFI applicants’ abilities to generate revenue; debt-to-capitalization ratios; portfolio risk; effectiveness in servicing existing debt; as well as management and operations capacity. In addition, the CDFI Fund stress tests the financial projections of program applicants to determine their ability to repay BG Program loans.
Because the examinations, reviews, and information collected from CDFIs applying to the BG Program are similar to those performed by Wall Street credit-rating agencies, the program has proven to be a good training ground for CDFIs seeking to access debt from the capital markets.
In fact, Standard & Poor's Global Ratings (S&P), which issues credit ratings for the debt of public and private companies, has provided investment-grade ratings for a half dozen CDFIs.[2] Three of these organizations have gone on to issue publically-rated debt.
- Capital Impact Partners: Through two application rounds, Capital Impact has been approved for a total of $95 million in BG Program bond loans. Capital Impact currently has an S&P AA- credit rating. In its credit rating report, S&P cited Capital Impact Partners’ overall asset quality, minimal risk profile, liquidity, and management. In 2017, Capital Impact closed on a $100 million public note shelf offering,[3] which received an AA S&P rating. The offering amount was increased by another $100 million to $200 million in 2018 and rated AA- by S&P. To date, Capital Impact has issued approximately $95 million in notes out of their total $200 million shelf offering.
- Local Initiatives Support Corporation (LISC): Approved for a $50 million BG Program bond loan in 2014, LISC then went on to receive an AA rating from S&P in 2016. S&P cited LISC’s organization strength and sustained community impact in its rating summary. LISC then issued a $100 million public debt offering that carried an AA rating from S&P in 2017.
- Reinvestment Fund, Inc. (RF): RF has been approved for a total of $126.6 million in BG Program loans from multiple bond issuances. RF went on to receive an AA- rating from S&P in 2017. In its ratings research summary, S&P credited RF’s minimal loss exposure, extremely low-risk debt profile, extremely strong history of loan performance, consistent growth in loans and assets, and experienced and prudent management as being among the reasons for this investment-grade rating. In May 2017, RF received an S&P AA- credit rating for a $50.9 million public bond issuance. In October 2018, RF announced the close of an additional $75.7 million in general obligation bonds.
In addition to providing much needed capital to CDFIs, the rigorous underwriting process that CDFIs must endure in the BG Program has turned out to be a useful stepping stone for CDFIs seeking to reach larger pools of capital from new investors. Looking ahead, we are eager to see if the data we are collecting on loan level performance by asset classes might also be used to bolster the case for CDFIs seeking greater access to the capital markets.
Lisa Jones is the Manager of the CDFI Fund’s CDFI Bond Guarantee Program.
[1] The Secretary of the Treasury provides a 100 percent guarantee on bonds issued through the BG Program. The guarantee amount is up to $500 million under the fiscal year 2018 authorization level. Each bond has a maximum maturity level of 29.5 years. The Federal Financing Bank (FFB) purchases the bonds and the proceeds from the bond sale are used to extend credit in the form of loans to participating CDFIs.
[2]Capital Impact Partners, Clearinghouse CDFI, Enterprise Community Loan Fund, Housing Trust Silicon Valley, Local Initiatives Support Corporation and Reinvestment Fund have all received AA or AA- ICRs from S&P.
[3] A shelf offering is a Securities Exchange Commission (SEC) provision that allows an issuer to register a new security without selling the entire issue at once. Portions of the issue can then be sold over a period of several years without reregistering the security.
