A private bond market emerges for low-income community development

From ImpactAlpha

By Oscar Perry Abello

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.

Inside the Mariposa Food Co-op, a four-decade old cooperatively-owned grocery in a predominantly black, low-income area of West Philadelphia. Reinvestment Fund financed the acquisition and remodeling of the co-op’s new location in 2010. (Credit: Mariposa Food Co-op)

Inside the Mariposa Food Co-op, a four-decade old cooperatively-owned grocery in a predominantly black, low-income area of West Philadelphia. Reinvestment Fund financed the acquisition and remodeling of the co-op’s new location in 2010. (Credit: Mariposa Food Co-op)

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.