Senior Vice President, Capital Markets, Community Reinvestment Fund
As some of you know we have added an additional half day tomorrow from 8:30 to 12:00. If you would like to participate in an interactive drill down tomorrow you can join us. Please also fill out your evaluation forms.
Kirsten: this is our last panel of the day. I know that you are not all engaged in pooling or aggregating loans. This panel will help you think about the capital markets.
I want to introduce Mary Tingerthal. Mary knows the capital markets from the private and public side.
Mary: our topic is a bit different from what we've talked about so far today. We will talk about strategies to increase volume but that's not all what we are going to talk about. Community development organizations have a desire to get more money into their communities for a lot of reasons. The thing that brings us together is to increase the amount of impact we have in our community. We are united by wanting to bring more money to the community and making a difference in our community.
This morning your heard about collaborations around different topics. When you voted you said it was valuable to collaborate around administration, technology and market research. This panel is about collaborating around finances. This is about pooling or aggregating financial resources. The housing partnership network created a collaboration around financial tools.
This is a collaborative model for raising corporate debt to a truly large scale pooling opportunity.
Each panelist will talk about what made them do it. What made them go to a new model? What did they do? What did they accomplish? What is better now? What were their lessons learned? What's next?
We are going to do a few questions with the voting tool?
1. Are you a CDFI or CBO involved in lending and/or investing?
a. Yes
b. No
Just about 50/50.
2. What is your primary area of lending/investing?
a. Housing
b. Small/micro business
c. Community facilities
d. Other
Housing is the most. What are the others? Comprehensive. CDFI.
3. Have you ever been involved in a transaction to pool or aggregate loans/investments or selling loans to a pooler?
a. Have completed one or more transactions
b. Working on first transaction
c. Thinking about or exploring it
d. Never considered it
A fair amount that have completed at least one.
4. What is the greatest obstacle you’ve experienced or anticipate with pooling transactions:
a. Nonconforming loans
b. Discounting of loans
c. Insufficient or unpredictable volume
d. Insufficient credit enhancement
e. Loss of contact or relationship with the borrower
f. Loss of current income when loans are sold
Non-conforming loans couldn't be pooled and a large group that wants to know more.
CIP Program Manager, Calvert Foundation • download ppt presentation
I'm probably the twentieth person that has talked to you today. I'm going to talk to you about the Calvert Foundation and also talk about another client we've worked with to raise capital. The Calvert Foundation was started by the Calvert Group Mutual Fund Company. It's about a $10b institution that specializes in socially responsible investing.
Wouldn't it be better to create an investment product that helps low income people? It's called our community investment note. It's broadly available to any investor. Although we have the word foundation in our name we only make loans - not grants. When I started 7 years ago we were at about $7m and now we have about $100m in assets. We want to popularize community investment.
Our goal is to bring investors together with borrowers. We lend to a number of different community based organizations and groups. We have a large range of investors from individuals to large organizations. There are over 2000 investors. Our portfolio is a lot bigger now and we lend to about 200 groups. The way the 501c3 was set up was to reduce the risk of investing in community development groups. By aggregating and pooling our loans together we were able to reduce the risk and we have some security enhancements built in as well. The Calvert Foundation brings portfolio management and due diligence capabilities to the table. We're trying to reach those investors that have difficulty or would not invest in their CDFI.
We allow investors to choose their interest rate from between 0-3%. We decided to separate the rate and the term and let the market match up. We have some investors that have a philanthropic bend and they loan at 0%. We used to have only a 5 year term but we have now got a 10 year term. Most of our money has about a 3 year cycle but the reinvestment rate is about 93%. With larger investors - investments over $25,000 - we can work with them to help them target their investment. One of our best innovations is that investors can now purchase electronically through DTC - which is similar to purchasing bonds and mutual funds. You can buy a Calvert Community Investment note along with other financial instruments. This will reduce another barrier to community investing.
This is a major breakthrough in community investment. What is unique about the Calvert Foundation compared to others is that we are a retail operation. We've now registered in 48 states so we can take investors from every state including non-accredited investors. Certain investments aren't available to non-accredited investors. We're trying to create a new path for community investment.
The challenges we're facing right now fit into the infrastructure category. Both internal and external infrastructure. We're growing and we have more money to place in communities. We're looking for new investment opportunities so that we can grow. Like many other non-profits we are raising the equity to support the debt we are carrying.
One of the things we are doing is helping other individuals and institutions replicate what we do. Both the investment side and the lending side. We have the private label investment note and the independent offering. From a mission perspective we are sharing this information and we're getting some earned revenue in consulting fees. It's going out and helping institutions replicate our investment product. For a fee we worked with this group in Europe that wanted to begin getting investors in the US to serve the non-profits they served in Europe.
This is another non-profit we work with. It's an interesting model of 10 CDC's getting together to raise money for the pre-development needs. This is the hardest capital to raise and this collaboration helps them get over that.
President, West Central Initiative • download ppt presentation
I think someone started saying they were the smallest organization here but I think we might be the smallest. We function as a regional community foundation and a community and economic development organization. We serve nine counties in west central Minnesota with a population of 210,000 covering about 8500 square miles. Our net assets have grown to about $35mm with about $19mm in our unrestricted endowment.
In 1986 there was a regional decline in the agriculture economy. We believed we could diversify the economy and create jobs if we created a way to get flexible loan funds.
We began to partner with local leaders, commercial lenders and utilities. We contribute by strengthening their portfolios as a secondary signer. Some of our component funds make grants or loans.
Component funds are part of our assets. West Central provides underwriting, loan documents and reports to the component funds. The fees are the same as other component funds. Our services and fees are similar to others.
With this program people can donate money, get a tax credit, target specific uses. We do the underwriting and we fill a gap in the market. When businesses know there is local money invested in them they feel an obligation to do well. We partnered with organizations that created good will and new money that was flexible money. Some of the donors were moved up the ladder and became longer term lenders. Some of the banks and utilities have become donors and we've increased assets over time.
33 of our 63 component funds have chosen to make loans. About 14% of our outstanding loans are from the component funds.
We've increased the number of manufacturing jobs in our area significantly.
Critical success factors. We can only work with a limited number of advisory groups. The local people don't like to say no to a project even if it doesn't have a good plan. Everyone wants their own fund with their own identity. Less then $1m is working right now out of $5.2m that is available.
We're looking for new ways to partner with advisory groups. We've recently made an investment in an ethanol facility and we have an angel network in our area that we're working with. We need to develop products for new Americans moving to our area. We've engaged a third party to do focus groups and the biggest threat is finding new funds. The advisory committees bring a lot and they also have a high turn over rate - which loses some of the history and knowledge of how the funds work. When market rates are low the difference between our rates and traditional lenders are minimal; we've not applied for CDFI status.
Conclusions
Yes, this approach could be adapted by developing partnering relationships between a community foundation and a community or economic development organization. Build on what you have. We've recently got loans for a new ethanol plant in less time then it would normally take.
Executive Vice President, Community Preservation Corporation • download ppt presentation
We've created a device to bring in bank capital to give multi-family loans. This is interesting because this could be adopted by others. We're a non-profit lender.
We're a mortgage company. We make construction loans and we place the permanent loan with investors. The problem was having a lot of origination growth. We grew to a couple of hundred million dollars a year and now we're in the neighborhood of $500 million.
We have a revolving credit line of about $300mm. At present we have over $700mm outstanding.
Our past practice was to have the revolving line of credit fund all loans. Smaller loans are the bulk of our closings. Our average loan size is under $2mm.
With small loans we could aggregate a lot of them but today we pool the construction loans and build appropriate sized pools for the investors that want to buy into them. The smallest was $2.2mm and the largest was around $60mm.
The investors buy 80% of the outstanding balance. They are obligated to buy the future advances too.
We retain the 20%.
Our construction loans are Libor + 330 basis points (3.3%). The bank investor gets 200 basis points above Libor.
What if loans pay fully in months 1-6 of a pool, but in the month 7, no borrower pays? The investor gets their 200 over Libor and they get that from the money we received in the first 6 months. The senior subordinated relationship is described here because it's different from the complexity you are familiar with.
Cutting the transaction costs was important to the banks. CPC retained 1st loss portion and that gives them comfort on a pool's credit. It's a pooled risk basis. It's an extremely unlikely event if more then 20% of the pool will not be recovered.
The banks were extremely focused on cutting costs. They might review us initially but the subsequent pools go faster. We have standard loan documents and all documents are scanned into PDF. We deliver the due diligence files electronically.
This is what the investors see.
If you have the printed copy you can see the slide with this heading on it. Tab 7 is always the environmental report. Tab 23 is always pictures. Different investors want to see different combinations of the package. They specify what they want to see and we send them that electronically so they don't even need to come into our office now and look through reams of paper.
Another feature of this was they were obligated to buy 80% of the future advances. You buy approximately 80% of the pool. We make the advances through the month and at the end of the month we true up. Once again they are at a full 80%. They want to make one large transfer instead of lots of smaller transfers.
This makes pooled loans as a desirable interest earning asset. We can group them geographically if they want. They are interested in interest earning pieces of paper. We have not had any defaults. We have kept the small delays from the investor (there have been short delays of between 30 and 60 days).
This allows banks to participate in loans they couldn't have originated themselves. This efficiently channels the banks money into affordable housing, and other projects that the community needs. This model has been very effective within its limitations. One problem this hasn't solved is that we have to keep the sold off part on our balance sheet. In our revolving credit arrangement we have a debt ratio we have to maintain. Holding a 20% part of a 25 year loan would be different.
If the idea is growth and equity becomes an important part of the equation then things are different.
President, Lending & Community Investments, The Reinvestment Fund • download ppt presentation
I want to thank our scribing illustrator.
The reinvestment fund joined with NCB to do joint fund raising and joint equity raising. DoE offered a large carrot and said anyone could apply within 60 days. There were three categories: public sector, non-profits and JV's. We needed capital both the lend to charter schools and to provide for capital improvements. We manage about $300mm today. We were offering $30mm every 6 months to charter schools. We all knew we were going to compete with each other. We figured we would have a high probability of getting zero if we all submitted proposals. We all decided to work together on this. The people that figured this out were the NCB Development Corporation. A few of those people that did not participate in the collaborative and applied on their own did not get funding.
We thought we were presenting a united front and a bigger foot print and a combined track record that could not be challenged. And we qualified for the JV category which had fewer proposals. We were drawn to the long term money for institutional real estate. We hoped to take that federal money and turn it into long term capital.
We covered NY to DC and all the states in between. We received $6.4mm and we raised another $35mm in bank capital and $10mm in subordinate capital.
NCB is the lead operational partner and handles the loan accounting, grants management, custodial and originations. We could not have replicated their capabilities. We were able to get very attractive money. The term piece was up to 15 years. We were even able to fund start up schools. We were also allowed to do lease hold improvement loans. We were able to allow a 1.1 point debt service ratio.
We were able to lend out at Tbill + 300basis points. We had a third joint venture partner to assess the schools. There was no standard underwriting boxes. To choose which school to lend to and which not to we created a third partner to go in and evaluate the readiness of the schools.
We got capital on our own terms. Most of the people we got money from had not done as much charter school lending as we had. They bought our underwriting model. This field has now received a great amount of attention and the schools can now access capital as start ups. We've been pushed into a different niche of schools that take longer to submit their facility plans.
Portfolio permanence this is not a recyclable pool. We are a regional lender and our lender was a national lender. This was capital available to us on a first come first served basis. There was some sunk costs. This was expensive to build the infrastructure and to develop the systems for the joint venture. If we had known the costs we might have thought about fund raising around this or we might not have put money up.
This is our only Joint Venture. This might be the only one we do. They pop up and make sense as needed. Each of the joint venture partners have gone on to apply for loans from DoE and both have been successful. NCB had the core competency to know the program and the Federal Government. We both learned from each other (we knew how to borrow from banks). We're in the process of creating the charter school growth fund. We'll be raising approximately $50mm from a bank fund.
President & CEO, NCB Development Corporation, FSB • download ppt presentation
It's hard being the last speaker. I stand representing three organizations - the National Cooperative Bank (NCB was created by a congressional charter) focused on housing and 35% of our lending is to low and moderate income communities.
The second is a federally chartered thrift.
NCB Development Corporation was created by an act of congress and it is solely focused on community development and community lending. There are about $2b in assets. $300mm in capital. This is as much a mortgage company as anything.
We mix names. We did about $230mm in community development loans. We do commercial real estate and low and moderate income areas. We do business with Charter Schools and we do some small business and community based organizations. We do arranged transactions - we use other people's money. There was also about $420mm in mission activities.
This is a balance sheet strategy. Our mission is for judicious use of our balance sheet. Our current challenges include: the loans are getting bigger. We have a capacity issue. There is a cost to doing nationwide business. You have diversity and that is good but when you do more then a quarter of your loans in low or moderate income areas you have to manage your portfolio and you are also in a regulatory environment. Often we bifurcate the debt. There is a senior piece and a sub-piece.
We have been growing capacity and we have a risk adjusted basis that is the best business we've done.
If you have a pool that looks like low income or community development loans you get in trouble from investors. We do a lot of educating of our investors and we have had a lot of success in doing that. We try to make this like standard underwriting and standard lending and we have leveraged the investor group with some success. We always maintain the servicing of the loans - including the special servicing.
We do a lot of arranged transactions. We use new markets tax credits. CCAP with charter schools and health clinics in California. The investor market isn't deep and we're hitting it over and over again. We're slicing up that capital structure.
By splitting up the capital structure you are optimizing the rate to the borrower.
in order to go to the next level we are creating homogeneity or more homogeneity in loan products. The investor market doesn't understand all the differences. They want to see some conformity. With homogeneity there is standardization of documentation. The other challenge is common servicing platforms. That doesn't mean you have to give up servicing. The one with the master servicing is the one doing the investor reporting. To sell loans that come in and collect in a bad situation
The cost of doing deals is tremendous. You will be going to rating agencies and paying them to rate loans. People want to know the strength of the representation of warranties.
We're examining this now. This is new to this sector. Combining equity fund technology with CDO structure. Funding the equity fund and that fund provides the role of the pooler. Because these loans don't fit into the typical category - this allows the fund to securitize those loans and retain the equity piece.
The advantages are you get attractive warehousing rates and attractive advance rates. Once you ware house and execute it we think this will result in lower cost for the borrowers. The flexibility of using a ware house to ramp it up and this CDO squared you can reissue the structure and create greater leverage; less money in to fund it and that money can circulate more quickly.
Question for John: What about the replicability in the rural markets?
We have a reasonably large volume that is flowing throughout the year.
Question for John: the 80% that you sell off is equivalent to a BBB rating. We looked at other slices and the amount of subordination is superior to other investment rates.
Do the banks have a restriction and are your pools large enough and your fees small enough? These rollover quickly and the banks buy multiple pools.
Part of the reason we have met is that there are theoretical limits to the number of loans banks will take onto their balance sheet. Does it make sense to go to a rated transaction to bring other investors into the fold? The need to pool within the CDFI community and whether there are enough loans that are similar?
1. Which of the following models/examples would you be interested in exploring further:
a. Calvert Community Investment Notes or Private Labeling
b. Component Funds
c. Partnership/strategic alliance to jointly raise capital
d. Selling loans to an intermediary involved in pooling or aggregating loans
e. Forming a network or collaborative to pool loans
