This month, Opportunity Finance Network invited Members to participate in a Market Demand Survey for OFN to apply as a borrower for the CDFI Bond Guarantee Program (BGP). OFN is considering this in order to pass on the bond proceeds to Member CDFIs in the form of OFN Bond loans which, OFN believes, would significantly expand the number and types of CDFIs that benefit from the BGP’s long term, affordable, fixed rate debt-capital.
CDFI Connect spoke with OFN Chief Operating Officer Cathy Dolan to dig deeper into the CDFI BGP and how the CDFI capitalization landscape is changing.
How is CDFI capitalization evolving and what role does the CDFI BGP play?
CDFIs have 30 years of expertise deploying capital to underserved urban, rural, and Native markets in innovative and productive ways, and with demonstrable results. Throughout these 30 years, CDFIs have deployed more than $50 Billion in financing relying principally on short term debt, despite the need from some of their borrowers for long term financing. CDFIs have made do with short term debt because that is all that was available. While incredibly helpful in getting us this far, CDFIs are now outgrowing the capacity and constraints of these traditional sources of capital.
Both the CDFI Bond Guarantee Program and the Federal Home Loan Bank system offer CDFIs long term capital at affordable rates in ways that can help strengthen CDFI balance sheets and offer borrowers more stable financing sources. Since both Programs require collateral, CDFIs will have to manage the needs of both secured and unsecured creditors and provide confidence that all debt obligations can be comfortably met. Likewise, CDFIs will have a more varied asset-liability mix which will require different strategies for liquidity and cash flow management.
Who could benefit if OFN is successful in borrowing under the BGP?
All Members could benefit, but we believe the highest benefit will be for Members that want to borrow less than $10 million and want to use the proceeds to make loans that have higher loan-to-value ratios of 80% or have second or third liens. Other benefits include a less onerous application process than what is necessary to apply for the BGP directly and lower transaction and legal costs. We do estimate it would cost between 50–100 basis points more to borrow from OFN than participating directly in the BGP.
What type of collateral would OFN require on loans it makes using BGP proceeds?
Based on BGP requirements, any loan OFN makes using BGP proceeds would have to be secured. Generally speaking, OFN will require borrowers to pledge loan receivables that are secured by real estate, equipment, accounts receivables, inventory, or furniture and fixtures. Cash and letters of credit would also be acceptable. While all of these collateral types are similar to what is required for any CDFI participating directly in the BGP, by borrowing from OFN, CDFIs are not subject to the first priority lien requirement or the maximum loan-to-value requirements of CDFIs borrowing directly under the BGP.
What interest rates would OFN offer its Members if it had BGP proceeds to lend today?
If OFN had BGP proceeds to lend to Members today, we estimate we could make loans that amortize principal equally over the life of the loan for
- 30 years, at 3.7%
- 20 years, at 3.5%
- 10 years, at 3.0%
While attractive now, I’ve heard BGP pricing could rise above levels at which my CDFI currently borrows. Is that true?
BGP interest rates are based off of US Treasury securities, so if US Government rates increase, debt under the BGP will increase. However, it will always be better priced long term debt than otherwise available because it is based on the most affordable source of capital globally, i.e., US Treasury securities. Furthermore, we all know that long term debt costs more than short term capital due to the time value of money. So, if you are used to borrowing for terms of under ten years, long term debt under the BGP will be higher. Can your borrowers afford to pay a higher cost? Probably not if you don’t change the tenor of your loans. However, if you could extend the repayment terms over a longer period of time, you could potentially lower your borrower's debt service payment. With a reliable, long term source of capital, you could more confidently offer long loan maturities and longer repayment terms benefiting your borrower with greater resources available for operating or growth needs.
While attractive now, I've heard BGP pricing could rise above levels at which my CDFI currently borrows. Is that true?
As a direct borrower in a Bond issued in 2014, Clearinghouse CDFI has used bond proceeds to make $23 million of loans to customers that were unable to borrow from more traditional lenders due to inconsistent credit histories, small scale operations, or negative perceptions of the neighborhoods they operated in. Most loans made with BGP proceeds have at least 25 year maturities. An example of one such Clearinghouse CDFI borrower is a non-profit that provides healthcare, counseling, and education services to extremely at-risk individuals in the low-income area of South Central Los Angeles. Clearinghouse CDFI's $1.26 million, 25 year loan was used to finance the purchase of a building that will house comprehensive services benefiting pregnant mothers and families with young children. These services include health education, substance abuse rehabilitation, and behavioral treatments.
Members who have not yet participated in the Market Demand Survey are asked to participate today. OFN will use the responses to size the BGP application request and to structure the loan products.