In a new ImpactAlpha blog, Christina Travers and Kathleen Keefe discuss LISC’s recent experience in the capital markets and what it might signal about investor engagement with CDFIs. “Is this environment forcing investors to step back from community development finance? Or, are they willing to respond with “catalytic capital” that specifically meets this moment?”
The excerpt below was originally published by ImpactAlpha
In an inflationary environment, are bond buyers still interested in CDFIs?
By Chrsitina Travers & Kathleen Keefe
Above Photo Credit: Courtesy of ImpactAlpha
Over the last few years, impact investors have sought out community development financial institutions (CDFIs) as vehicles to connect their capital to pandemic relief, racial equity investments and expanded economic opportunity in disadvantaged U.S. communities. The influx of new capital has helped seed and scale innovative efforts that might otherwise have taken years to get off the ground, if at all.
More recently, though, the economics of those relationships have changed. Rising interest rates have created a mismatch for CDFIs, especially those tapping the capital markets to finance activity. To issue debt at market rates means pushing our cost of capital beyond what mission-driven partners and projects can afford. And CDFIs, many of which are themselves nonprofits, can only absorb so much of that gap before it becomes untenable.
The circumstances are raising some difficult questions. Is this environment forcing investors to step back from community development finance? Or, are they willing to respond with “catalytic capital” that specifically meets this moment?
Our recent experience points to the latter. My organization, the Local Initiatives Support Corporation (LISC), is a large CDFI with an Impact Notes program accessible to institutional and retail investors. We had raised $110 million since its launch in 2020—that is, until last spring, as yields grew beyond what we could lend to our community partners. We paused our monthly offerings, drawing on our other sources of capital while waiting to see if rates would settle.
At the time, we were cautious about issuing debt at concessionary rates because of the market-rate we had been able to use for our issuances to date. We were concerned that if we changed this narrative the market might read it as CDFIs being a better fit for philanthropy than the investment market. We have spent years working to educate investors about our market relevance, elevating decades of proof about the structure, stability and impacts of CDFI social investments. If we issued at below-market rates, we could upend that progress and affect future opportunities to raise capital from the markets.
Thankfully, we found those worries to be unfounded. After some promising conversations with ESG investors, we came back to the market in early 2023 with a three-year, ‘AA-‘ notes at 4 percent. While it was below the 4.4 – 5 percent offered at the time by comparable fixed-income products priced to the market, it nonetheless attracted investors drawn by its investment grade S&P rating and our underlying CDFI mission, alongside the note’s clear connection to many of the UN Sustainable Development Goals and our Project 10X initiative focused on racial equity
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About the Authors
Christina Travers, Executive Vice President & CFO, LISC
Prior to joining LISC, Christina was the CFO of Working Solutions CDFI, a San Francisco Bay Area microlender. During her time at Working Solutions, she focused on the migration to a single treasury management platform, financial management report creation, debt consolidation, financial forecasting and the implementation of a risk assessment based asset management function. Christina also spent over two years at the Low Income Investment Fund (LIIF) as Vice President for Finance & Capital Strategies. In this role, she served as a liaison and resource for LIIF’s banking and other lending relationships. She also oversaw the corporate budget process, financial forecasting, investment portfolio management, treasury services, and cash management. Before LIIF, she spent ten years at LISC as Senior Vice President for Finance & Capital Strategies.
Kathleen Keefe, Investor Relations and Portfolio Reporting Lead, LISC
Kathleen Keefe is the investor relations and portfolio reporting lead at LISC, where she manages the LISC Impact Notes program and leads analysis and reporting to lenders on LISC’s $550+ million loan portfolio. She has experience supporting CDFI investment products at Capital Impact Partners and in local economic development through work with the City of New Haven’s Economic Development Administration. Previously, Kathleen worked in development consulting, managing large-scale U.S. Agency for International Development economic growth projects in Eastern Europe, and in domestic policy research. Kathleen holds a bachelor’s degree from Wellesley College and a dual MBA and MPP from the Yale School of Management and the Yale Jackson School.