The Future of CDFIs in the Charter Market
In March 2006, a group of leading CDFIs facilitated by the Housing Partnership Network (HPN) gathered in Chicago at the MacArthur Foundation to discuss ways of working together to gain greater access to the capital markets. A variety of strategies were discussed, ranging from creating a CDFI-owned bank to aggregating and securitizing pools of loans. The conversation was not specific to charter schools but included all asset types originated by CDFIs. To find common ground and move forward, meeting participants submitted data on lending separated by asset type. Data revealed the growth of CDFIs in the charter market but had not yet been quantified by participants (see Figure 4.5). CDFIs were building enough scale to be taken seriously by the capital markets. To further pursue the concept of securitizing charter school loans, a subgroup was created that included LIIF, NCB Capital Impact, Raza Development Fund, Self-Help, TRF, HPN, and CRF, a national nonprofit financial intermediary that securitizes economic development loans.
With the help of Wilary Winn LLP, a Minneapolis-based firm, the group is creating the Charter School Financing Partnership (CSFP). CSFP will function as a cooperatively owned conduit that will accumulate charter school debt and sell securities backed by the debt into the capital markets. CSFP will be owned by the CDFIs originating product, with HPN playing a facilitation role. Ideally, CSFP is seeking to issue rated, tax-exempt pass through securities backed by pools of tax- exempt bonds issued on behalf of individual charter schools. The pools will have a “senior/subordinate” structure, meaning that some investors in the securities will have a senior position in the cash flows of the pools and will be paid their principal first at a lower rate of interest. Other investors will have subordinate positions and will be paid more slowly at higher rates of return. If successful, the pooling mechanism will result in charter schools receiving better rates and terms than would otherwise be possible. Schools that might be rated below investment grade, in the B to BB range, will enjoy access to tax-exempt bonds priced as if they were B to BB or higher, that is, at an investment-grade level.
While the asset-backed securities (ABS) market is well established at an estimated $1.6 trillion in 2006 (Barclay's Capital Research 2007 Outlook), only one securitization of tax-exempt issuances has been issued. CSFP must be prepared for market resistance. To help overcome these obstacles and to improve efficiency, CSFP is seeking credit enhancement from CECSF as well as other forms of socially motivated capital.
The CDFI field has been engaged in dialogue about accessing secondary markets for community development assets. While the benefits of securitization are well understood and considered desirable among most CDFIs, there have been few tan-
gible opportunities as ripe as the charter school market to pursue securitization. To accomplish CSFP goals, its members will have to begin building the infrastructure the field has been discussing for all these years but has not commenced constructing. CSFP must create a common originations and servicing platform. CDFIs will have to agree on and adhere to one set of underwriting criteria. They will have to use standard documents and contract with a master servicer. Selling assets into a conduit will mean that CSFP members will not hold those assets in portfolios. This will affect the revenue model and balance sheet for participating CDFIs. Fees will replace earning assets, and liquidity will improve. To make the model work, increasing volume will be essential. Customized loan structuring as a way of doing business, a hallmark of CDFIs, will be challenged.
Not only is the market ripe for CDFIs to experiment with securitization, time is of the essence. As the charter market matures, CDFIs are beginning to lose deals before they are closed or see their deals refinanced with tax-exempt bonds. This is likely to become a trend. CDFIs must make strategic adjustments in a timely manner to continue to add value in a marketplace they helped build. All indications are that CDFIs are prepared to do just that.