Corporate Investors
The benefits of investment in a Charitable Bond
How Charitable Bonds work
Corporate benefits of Charitable Bonds
Purchasing bonds
Risks
The benefits of investment in a Charitable Bond
- a high-impact, measurable demonstration of CSR in action
- initial investment returned in five years' time
- bonds retained as assets
- a high value, tax exempt yield for charity
- releases instant funds for charity
- five-year CSR dividends from a single transaction
At the request of one or more charities, Citylife may create an offer of bonds on their behalf. Individuals and organisations may subscribe to invest in the bonds during a set offer period.
When the offer period closes, around 80 per cent* of the total raised is loaned at a commercial rate of interest to a registered provider of social housing. The housing provider is regulated by the Tenant Services Authority, and will use the loan as part of its business to develop and maintain affordable housing. The remaining 20 per cent or so after costs is immediately given as a tax exempt grant to the charity (or charities).
After five years, the housing provider repays the loan with interest – taking the fund to its original 100 per cent level – and bondholders are repaid in full. So on an investment of £100,000 for example, around £20,000 will immediately go to charity while the rest will work to create affordable places to live.
* Exact figure depends on commercial interest rates at time of issuing the loan – see example below.
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Example Citylife offers bonds on behalf of a charity which raise £1 million. Based on a commercial rate agreed in advance, Citylife will lend an exact proportion of this to a housing provider so that the sum repaid after five years is exactly £1 million. For example, at a rate of 5% per annum the proportion of the investment loaned would be £783,526. |
Corporate benefits of Charitable Bonds
Corporate social responsibility
Supporting a Charitable Bond is an effective, high-impact way of demonstrating CSR. It not only generates a high return on investment for social causes, it also creates a more dramatic message about your CSR commitment.
For example, if you invest £100,000 in the East London Bond at zero interest you may consider there to be an annual opportunity cost to your company. Whether you invest £100,000 in the Bond or give the value of this opportunity cost each year as a direct donation, charged to profit and loss, the cost to the company is the same. However, by investing in the Bond you can announce your six-figure support for charity while retaining the money as an asset on your balance sheet.
For the charities, there is greater benefit in receiving a lump sum now than the same amount (or less) over five years. And from one single transaction you will gain those CSR dividends reported every year for five years.
Immediate Benefits to Charity
An investment in a Charitable Bond will release immediate funding for the beneficiary charity for that Bond. This up-front grant will be of greater value and more effective in enabling the charity to achieve its mission than an equivalent amount in smaller donations spread over five years.
Value
Citylife will loan around 80% of the proceeds of each Charitable Bond to a registered provider of social housing. The exact proportion to be loaned will be calculated according to the rate of interest agreed, such that the total amount to be repaid after five years equals the amount required to repay bondholders in full.
By pooling the capital from multiple investors, Citylife is able to on-lend the investment in the Bond at a commercial margin above standard rates. Furthermore, since Citylife is a charity the interest gained on the loan is tax free.
This means that the proportion Citylife needs to loan to the housing provider is lower, and therefore the proportion that is given to the charity is higher.
Bonds retained as assets
The bonds you purchase are retained as assets. This means that buying a bond may not have any material impact on your Profit and Loss accounts.* In the event of changed circumstances the bonds could also be used as collateral against borrowing or transferred to a third party.
* Your accounting of bonds purchased will depend on your specific circumstances and you may wish to seek further professional advice.
Initial investment returned in five years' time
Investors will be given the opportunity to receive their principal investment at par five years from the date of issue of the Bond. At this point you may choose to donate all or part of your investment to the charity you have supported through the Bond, or to roll all or part into a subsequent Bond if available.
There are different values of bond that you can buy, at £1,000,000, £100,000, £10,000, £1,000, and £100. This allows you to buy a combination of bonds for the amount you wish to invest, and after five years to invest some or all of the bonds in a new Bond if available, or to donate some or all of the bonds to charity.Once the offer document for a Bond has been published, you need to complete an application form and send us payment for the amount you wish to invest. The bonds are officially purchased on the issue date when you will be sent a certificate confirming your purchase.
A low risk investment
Citylife believes the risks of investment in a Charitable Bond to be very low.
The housing provider
The loan to the housing provider will be made for a term of five years and at a commercial rate of interest. The total amount repayable under the loan including interest will equal the amount required by Citylife to repay bondholders in full. The loan is assigned to an independent trustee (see below), which means that investors are taking credit risk on the housing provider’s ability to repay the loan, not on Citylife’s financial standing.
Registered providers of social housing are regulated by the Tenant Services Authority (TSA), the government regulator for affordable housing. Part of the role of the TSA is to protect tenants’ interests by ensuring that registered providers remain financially viable and settling the affairs of any providers who become insolvent.
Citylife only lends to providers that it is fully satisfied are of suitable credit based upon reports by the TSA and credit ratings by a bank or independent ratings agency. Details of the provider that Citylife will lend to for a particular Charitable Bond will be given in the offer document for that Bond.
The guarantee
Depending on the arrangements for a particular Charitable Bond, the loan to the housing provider may be backed by a bank guarantee. While the loan is considered by Citylife to be a very secure investment, the guarantee provides a further layer of protection. In the event that the housing provider is not able to repay the loan in part or at all, the guarantee means that the bank would pay the shortfall.
The arrangements for a particular Charitable Bond will be described in the offer document for that Bond.
The Trustee
The loan, and any associated guarantee, is assigned to a trustee. This means that even if Citylife were to stop trading, the trustee is in place to receive repayment from the housing provider and then to pay monies it receives to bondholders at maturity.
Possible Risks
Like any financial investment, investing in a Charitable Bond contains certain risks. Some of the risks that Citylife believes are material are set out below. However, please note that there may be other risks involved in investing in a Bond and certain risks may be due to your individual circumstances. If you are concerned about these risks you must consult your independent financial advisor.
Social investment and access to capital
A Charitable Bond is a social rather than financial investment. The bonds do not pay interest or provide any capital gain and, except at Citylife’s option (which it may not decide to exercise), the bonds are only repayable on the repayment date. The bonds are transferable, although there is a risk that you may not find a purchaser for bonds, and any purchaser may only be willing to buy the bonds at a discount.
This means that the bonds are not suitable for investors who require income or capital gains from their investment or investors who need ready access to their capital.
Credit risk on the housing provider
The bonds are limited recourse to the loan to the housing provider. In the event that the housing provider does not or is unable to repay the loan in full (or at all) then bondholders will not be repaid in full (or at all) on the repayment date. The general assets of Citylife are not available to make payments to bondholders.
As described above, Citylife only lends to housing providers with a low risk of default.
Credit risk on the guarantor
In the event that the housing provider does not repay the loan in full (or at all) then bondholders who have invested in a Charitable Bond with a bank guarantee may benefit from monies received under the guarantees. However, in the event that the guarantor does not or is unable to pay under its guarantee then bondholders will not be repaid in full (or at all) on the repayment date.
Financial Services Compensation Scheme
The Financial Services Compensation Scheme does not apply to an investment in a Charitable Bond.
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Contact us
We’re happy to talk to you directly if you have any further questions about how Charitable Bonds work, although we cannot give you any financial advice. If you are in any doubt about whether an investment in a Charitable Bond is suitable for you or in respect of the tax consequences of the Bond then you must consult an independent financial advisor.
You can contact us at:
bonds@citylifeltd.org
01223 323481
Content accurate as at 4 January 2010