The Low Income Investment Fund, a San Francisco-based nonprofit, met with 10 times the investment interest it needed to float a $100 million “sustainability” bond last week, indicating strong demand for such bonds. LIIF will use the proceeds to support community development projects, according to the Barron’s Magazine.
Demand from buyers including Pacific Investment Management Company, Nuveen, and Neuberger Berman helped the fund lock in durations of seven and 10 years for its debt, improving its credit profile. LIIF says the offering will enable it to lend to developers and nonprofits “with more stable, lower-cost, and longer-term capital, which supports their long-term sustainability and enables them to provide much-needed services in their communities.”
The degree of interest was surprising: To the best of LIIF’s knowledge, similar deals typically have been 1.5 or two times oversubscribed. The fund ascribes the interest to its financial profile; an appreciation of the mission of community-development financial institutions (CDFIs); a “building understanding and education of the market,” and third-party ratification of sustainability. “It all kind of came together,” says Daniel Nissenbaum, LIIF’s chief executive officer.
“If you’re an investor and you’re looking for impact, and an investment-grade rating, and stability, and a record, it was all wrapped up in a bow there for people,” he tells Barron’s.
The debt sale, run by Morgan Stanley and J.P. Morgan, was the first of its kind for LIIF, and shows the growing demand for investments with positive social and environmental impact. Investors have been talking about so-called “green bonds” and other “socially responsible” investments, but supply has been short. Since 2014, the Climate Bonds Initiative has publicly certified $88 billion of bonds, across fewer than 200 issuances. The amount of credit-market debt outstanding in the same period has expanded to $72 trillion from $61 trillion, according to the Federal Reserve.
“While sustainable initiatives are gaining traction and green-bond issuance has registered impressive growth rates, this issuance represents less than 5%” of the municipal market, UBS Global Wealth Management’s chief investment office stated in a note last month.
”Thus far there has been a lack of clear pricing benefit to issuers,” UBS strategists led by Thomas McLoughlin and Kathleen McNamara wrote. “Some issuers will be reluctant to enter the green-bond market until a pricing advantage is clearly established…as the demand for green bonds further develops.”
LIIF, which describes itself as a “bridge between private capital markets and low income neighborhoods,” says it will use the money to fund projects similar to the work it has supported in the past: building or preserving affordable housing in San Francisco or Washington, D.C., or building centers with health-care or retail services in neighborhoods with limited access.
“We are excited to partner with an organization such as Low Income Investment Fund, which works to create a societal impact while maintaining a historically low default rate in their fund,” says James Lyman, co-portfolio manager of Neuberger Berman Impact Investments.
This is the first bond from a CDFI to get a second-party opinion on sustainability aspects from data provider Sustainalytics. LIIF says it is also the first CDFI bond to align with the United Nations’ Sustainable Development Goals.
S&P Global Ratings rated the new bonds A- with a positive outlook, citing LIIF’s “continued strong loan performance and management team that has addressed refinancing and variable rate debt risk.” LIIF has one of the lowest delinquency rates among rated CDFIs, S&P says.
LIIF estimates that the $2.5 billion in financing and technical assistance it has provided since 1984 has generated $65 billion in “family income and societal benefits.” The organization says that efforts it has supported have created and preserved 78,000 units of affordable housing, 271,000 child-care spaces, 98,000 spaces in schools, and 36 million square feet of community facilities and commercial space.
While some of LIIF’s financial metrics lag those of its higher-rated competitors—the fund has had a 43% ratio of net assets to debt over the past five years, compared with a median of 69% for peers—S&P analysts Richard Kubanik and Ki Beom Park wrote, “this refinancing greatly reduces LIIF’s overall risk profile.”
Prior to this issuance, almost 27% of LIIF’s debt was due by 2021, S&P says.
The new issue refinanced outstanding floating-rate debt, which provides certainty. Locking in longer maturities was helpful, too, Nissenbaum says, as banks have ratcheted down the tenor of debt they’ll offer in recent years, due to capital rules and other reasons: “We used to be able to rely on three, four, five-year termed and fixed-rate sources of capital, and over the years that funding market has changed and we’re now on two- to three-year revolvers [with] floating rates.”
That created a mismatch for the organization, given that their community loans are longer-term and at fixed rates.
“You can see why the bond market is exciting for us,” he says.
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