Foundations and Trusts
The benefits of investment in a Charitable Bond
How Charitable Bonds work
Benefits for Foundations and Trusts
Purchasing bonds
Risks
The benefits of investment in a Charitable Bond
- a secure, programme related investment
- releases instant funds for charity
- investment supports development of affordable housing
- capital remains on balance sheet
- initial investment returned in five years’ time
Citylife’s Charitable Bonds work by providing a combination of grant funding and capital loans.
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.
|
Example |
Benefits for Foundations and Trusts
| “This approach to making money work harder is a challenge to grant makers, who are usually averse to lending over giving, but the Northern Rock Foundation trustees wished to set an example for others to follow and hope that other grant making trusts will seek to maximise their assets in a similar way. It is an exceptional contribution which demonstrates that we can be flexible in delivery methods with our grants. Again, we can recycle our money whilst using it to leverage far greater social value than conventional investment and grants could ever have achieved on their own.” Fiona Ellis, former Director of Northern Rock Foundation (NRF), speaking after NRF invested £500,000 in a Citylife Bond. At maturity of the Bond, NRF rolled its investment over to a second Bond and added a further £500,000 to make a total £1 million investment. |
Programme related investment
Investing in a Charitable Bond will deliver social benefits from 100 per cent of your capital.
Around 20 per cent of the capital invested is given as a grant to charity, which is effectively the same as if a foundation or trust gave the grant directly. However, the benefit of the Bond is that it is a combined package.
The remaining 80 per cent or so is loaned at a commercial rate to one or more not-for-profit registered providers of social housing. These are government regulated housing providers that build, develop and maintain housing for local communities and key workers. They typically support people in need through provision of low-cost rental accommodation and through financial schemes, such as shared ownership, to help those who cannot afford to buy their own homes outright. They may also offer other services such as sheltered housing or at home care.
So with a Charitable Bond, you can use both your grant funds and assets to meet your charitable objectives in a secure way.
Lever additional investment
Citylife’s Charitable Bonds provide an additional source of income for charities by attracting investment from individuals and businesses above what would normally be given through donations and grants. Many of these potential investors may be more likely to invest, and to invest larger amounts, in a Bond if they can see that others have already made an investment.
Therefore by supporting a Charitable Bond your money has the potential to achieve more because of the additional finance it could lever.
Initial investment returned in five years' time
You will receive your principal investment at par five years from the date of issue of a Charitable Bond, allowing you to recycle it again for further social benefit. At this point you may choose to roll all or part of your investment 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.
Risks defined
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.
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
^ Top
Content accurate as at 4 January 2010