Raising finance: Is the bond market the right solution for your charity?
With many charities looking to raise finance in the near future, the bond market appears an attractive option following the recent success of a number of issues. David McHattie, our Head of Charities, Corporate Banking, shares his experiences of working on a number of bond issues for Housing Associations, where bond finance is now a major part of the funding stream.
We work closely with a number of charities throughout the UK, all with differing ambitions and resources, but there is invariably one topic of conversation which is never far from the top of everyone’s agenda – finance, and the means of raising it.
One area your charity might want to consider more closely, especially during this prolonged period of low interest rates, is that of the bond market. I know from previous experience of working with bond issues for Housing Associations, that they can be a viable financing option if the conditions and circumstances allow, and it would appear that an increasing number of charities are now turning to bonds to diversify their access to finance.
As with all investment options, bonds won’t be suitable for everyone, but if you think you might be interested in finding out more, then the following information should help to address some of the early questions that you might have:
* Who can issue a bond? - Any charity that needs long term finance and that has the power to borrow. You need to be able to explain to investors what the money will be used for, and how the money will be repaid.
* What is the term? - Typically a maximum of 5 years. The money will arrive in one lump sum on the day of issue and be repayable again in one lump sum on the maturity date. You will need to be clear about how quickly your charity can make use of the bond proceeds as interest is payable to the bond holders whether it is used or not, hence there is a cost to raising money too far in advance.
* Certainty of funding? - An Investment Memorandum is prepared to sell your charity to a wide range of investors. These will typically be Foundations and private individuals. They will be attracted by the purpose of the charity and the rate of return offered. With many competing investment ideas you must ensure you offer a competitive return to attract investors. It may take a while to corral all the investors together, so you need to allow plenty of time, especially if the terms of your offer are a bit tight from the investor perspective. Most bonds succeed in raising the full sum required, but it is not guaranteed and can take several months from start to finish.
* How can we make our bond more attractive? - Charity bonds are not rated, so investors prefer secured rather than unsecured issues. A strong brand name helps with investor recognition but isn't essential if the purpose of the bond monies is very clear and has a strong social purpose. For key investors, the charity management will usually undertake a series of roadshows or investor meetings, either one on one or in small groups. This is quite time consuming, but gives an opportunity to sell the charity and deal with any investor questions directly
* What will it cost? - An Investment Memorandum has to be prepared to sell your charity to investors, there are arrangement fees, listing fees and legal fees to pay. This is not a low cost option, although it can be set up as a bond programme to allow future issues under the same documentation which is more cost effective.
* Will issuing a bond impact our donations? - With both individuals and Foundations there is a risk that they will divert donations to invest in a bond, thus reducing revenue, however they may be prepared to leave the money in the charity at maturity rather than requiring repayment. Bond and loan monies have the advantage of being unrestricted monies which is helpful to some charities whose main incomes are heavily restricted .
* With interest rates forecast to rise in 2015, will our bond interest costs also rise? - Bonds are typically issued with a fixed interest rate until maturity, so changes in interest rates in the meantime won't affect you. Typical interest rates range from 2% to 5% pa dependent upon term.
* What interaction should we typically have with the investors after issuance? - A Bond issue will usually include financial covenants, so investors will want an annual report on your financial accounts, and potentially a social impact report annually. Regular communication is helpful, in the same way as you do for your donors so that they understand what the charity is doing with the bond monies. Whilst most investors will hold the Bond until maturity, and most understand that a market for selling the Bond may be limited, it is helpful for investors to have the bond listed on an exchange, so that they have a means of liquidity if they need it
* What else do I need to know? - If you want to raise long term funding, the bond market is a valid alternative to the bank debt market. However, if all this sounds like it is not for you, then traditional bank debt remains a very flexible option. It is cheap and quick to arrange, using standard documentation so fees are low and can be arranged with staged drawdowns and regular repayments, so that you do not face having to pay the entire sum all at once in the future. The other key difference is that bond debt is a public debt market, so a retail bond issue will be publicised, giving an increased profile in the media. If this is your rationale for looking at the bond market then bank debt wouldn’t be for you in this case.
If you are interested in finding out more about bonds and how to arrange a bond issue, please speak to your Charity Investment Advisor or Relationship Director. We have a wide range of expertise across Barclays and will be able to assist you, or connect you with the right people.
If you have questions relating to the articles, please contact your Charity Investment Advisor or Relationship Director.