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to the Capital Markets

Going Mainstream: NPOs Accessing the Capital Markets

Exploring the Use of Traditional Financing Methods, Processes and
Debt Instruments for Expanding the Capital Structure of
Nonprofit Community and Economic Development Organizations
Gregory M. Stanton,
Director, Capital Markets Access Program

Jed Emerson,
Senior Fellow, William and Flora Hewlett Foundation
Bloomberg Senior Research Fellow, Harvard Business School,

Marcus Weiss,
President, Economic Development Assistance Consortium


Not-for-profit (or “nonprofit”) organizations (NPOs) have the potential to creatively access mainstream
capital markets. The purpose of this article is to help improve the conversation regarding techniques by
which NPOs, working together with capital market financiers, may engage in practical ways to finance the
assets or businesses of community economic development organizations (CDCs).

The information provided here is offered to help senior NPO management explore viable funding
alternatives. Learning the craft of participating in mainstream capital markets can graduate a NPO from
fund-raising to financing with the goal of diversifying sources of capital. The increased role played by
credit enhancement in improving the quality of transactions originated by nonprofits should lead to broader
access to the institutional markets. This discussion reviews the various types of capital structure instruments
currently available to, but infrequently used by, community-based nonprofit organizations. It also outlines
the important obstacles to avoid and steps to advance in order to prepare one’s organization for alternative
market rate sources of capital.

This first article provides a basic primer for NPOs on how to better use the debt instruments of the capital
markets and financial technical assistance. The contributing authors, Greg Stanton (CMA), Jed Emerson,
and Marcus Weiss, (EDAC) represent many years of senior management experience derived from the
nonprofit, capital markets, philanthropic and government sectors. In helping NPOs bridge the significant
capital divide between the ‘haves’ and ‘have nots’, we offer tools to the nonprofit sector in realizing their
potential for growth by developing a more consistent access to the institutional market rate capital markets.

For copies of this paper or for posting to your website, please send an email
request to: Greg Stanton, Capital Markets Access Program at the email
address: or send a written request to:
Capital Markets Access Program 30 Lincoln Plaza, NY, NY 10023

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I. The Case for Accessing Capital Markets

Today’s community development organizations, comprised of community development corporations

(CDCs), community development credit unions (CDCUs) and community development financial
institutions (CDFIs), and other related entities face a growing demand for their services that requires
more capital to fund operations. Most of the time, these funds are provided by socially motivated
capital providers (SMC), including philanthropic organizations, government grantors and “angel”
investors, among others.

Yet demand for capital continues to grow beyond the investment capacity of SMC. This capital need
should motivate a collaborative effort among Wall Street, practitioners, business schools, and
philanthropy to develop capital market solutions, financial products, technical assistance, capacity
building and financial infrastructure to provide sufficient capital to this important sector.

Over the past ten years, a host of new nonprofit consultants and intermediaries have represented that
they are investment bankers to the nonprofits – some who claim to be transaction agents without having
done a transaction other than below market lending. This is a real problem for the sector. There are too
many providing too little in the way of results-oriented financial assistance. It would have been very
helpful if NPOs did have real access to skills and capacity provided by qualified and seasoned
intermediaries who can successfully lead others to institutional market-rate capital.

The current landscape is spotty with authentic financial problem solving capacity and product
development that can and will be financed in the markets on an ongoing basis. There are several reasons
why nonprofit organizations like the ones listed above may want to look beyond these traditional
sources of funds.

First, their need for capital exceeds the supply from conventional sources. The traditional funding
sources (such as community banks, CRA-driven regional and national money center banks, nonprofit
financial intermediaries, and grant monies) simply cannot keep pace with the actual dollar demand for
capital. Most nonprofits are undercapitalized and they are often unable to realize their potential

Secondly, the current funding sources can be unpredictable. All too often, seemingly longstanding,
friendly and sympathetic sources of socially-motivated capital disappear overnight. The evaporation of
a single major lending source can jeopardize the life of the entire organization, a danger which
motivates corporate chief financial officers (CFOs)—and their nonprofit counterparts—to constantly
search for multiple sources of financing. 1

Furthermore, the short life cycle of traditional funding sources tends to inhibit long-term projects and
planning in nonprofits. Nonprofits often labor under the continual cycle of annual fundraising efforts
and are forced to finance their long term operations with short term funding strategies, such as annual
grants, contracts and subsidies.2 Many nonprofit executive directors readily acknowledge that their
excessive reliance on philanthropy and government subsidy is problematic—not only for the
sustainability of their organization, but also for retaining quality personnel. Many NPOs are not able to
realistically engage in financial planning for longer than one to two years. These organizations are
Traditional functions of the modern day corporate chief financial officer have few similarities to NPO CFOs. Usually any CFO is required to
establish multiple banking relationships or locate multi-sources of capital rather than being dependent upon one or few sources. If for any
reason a single lending source decides to pull a credit facility or call a loan, the life of the organization would not be jeopardized. This is not the
case for most NPOs.
2. While some NPOs enter into long term contracts for services, (such as child care, AIDs, programs homeless health care facilities and
services) others have become more hard-pressed to find consistent and reliable funding sources to cover operations needs. These long-term
commitments dramatize their mismatched financing situation (which is similar to the challenge faced by many of the thrifts in the early 1980s).
This gap occurs with long term liabilities and short term assets, commonly referred to as ‘the duration gap’.
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handicapped in growing their operation when they face the annual risk that their grants or contracts may
not be renewed or may even be cancelled.

Given the limitations of current funding practices, community development organizations would do well
to consider how alternative sources of financing like those provided by the capital markets might benefit
their operations. An example is advances against future contract revenues as a structured debt financing,
nonprofit bond finance, debt participations offered by CDFIs for pools of small business loans,
Community Bond Notes 3 or collateralized CDFI loans offered as a debt security by Community
Reinvestment Fund (CRF) 4

While there may be many uses and connotations of the term ‘capital markets,’ for the purpose of this
article, “capital markets” will refer to market-rate capital provided by for-profit institutional investors
such as pension funds, insurance companies, trusts, mutual funds.

On the face of it, the idea that a mutually beneficial relationship could exist between nonprofits and
Wall Street seems improbable. For reasons discussed later in this article, the nonprofit world tends not to
trust return-driven capital. In addition, most assets originated by the nonprofit sector are non-
conforming assets, which means they have wide-ranging performance characteristics and lower-than-
average borrower credit quality. In general, it is difficult to finance heterogeneous and unpredictable
assets of this type in a market that prefers a high degree of homogeneity, standardization, and
predictability. Nevertheless, representatives of Wall Street firms and rating agencies have advised CDC
leaders and government officials that their institutions can be flexible and responsive.5

The experience of investors in emerging markets, however, has taught us that any asset with cash flows
could potentially be financed in the capital markets, if the asset’s performance is documented and of
sufficient size. For example, in the early 1980’s, when the capital markets were wrestling with how to
cost effectively finance mortgages to low income Americans, they responded by doing extensive
research on the historic performance of FHA loans.

The U.S. government and a number of broker/dealers set up a pooling mechanism to buy portfolios of
FHA mortgages. Organizations such as Fannie Mae Corporation provided the much-needed
infrastructure to “cobble” or aggregate mortgage loans in order to create sufficient critical mass. This
capability is missing for NPO asset types such as small business loans originated by CDFIs. By pooling
these loans, financial engineers were largely able to diversify away the risk element of any single loan
and thereby make the pool as a whole portfolio capable of market-rate financing. Subsequently, this
generated the beginning of one of the largest financial product development periods in Wall Street’s
history with the introduction of securities and debt instrument such as Collateralized Mortgage
Obligations (CMOs), REMICs 6and GNMA bonds. (Please see Glossary at end of paper…!)

Historically, emerging markets 7 have evolved when there was enough information generated for
investors to make determinations about cash flows from a specific pool of assets. A pooling mechanism
evolved to increase scale and subsequently securities firms developed financial products the institutional
markets would accept. Through the complementary activities of research, financial technical assistance
(FTA), infrastructure and financial product development, market demand was gauged and quantified.
This process has been the common protocol for bringing new debt instruments to market. The issuance
Community Bond Notes are the innovation of the Calvert Foundation, Bethesda, MD
CRF located in Minneapolis, MN, as an innovative NPO which pools small business loans from CDFIs, adds credit enhancement and sells the
security to pension funds and institutional CRA investors.
A number of Wall Street firms such as CIBC, Advest, Lehman Brothers, Chase and Soloman Smith Barney along with McClenner Securite
and American Capital Access Corp. stated their willingness to be flexible with NPOs at the Pocantico Credit Enhancement roundtable held on
December 1999
REMIC is the acronym for Real Estate Mortgage Investment Corporation, a pool of securitized mortgages of single and multifamily origin
with certain tax benefits
The emerging markets are a relatively new class of assets such as future receivables or future contracts securities or it also refers to a usual
and customary financing in a more financially undeveloped geographic area in the world such as Latin American debt
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of corporate bonds follows the same exact process that a group of NPOs would follow in undertaking
the origination of similar type assets. Like any corporate issuer, NPOs would need to track their asset’s
historical performance to develop a marketable financial security or product which meets their capital
requirements and investor’s parameters.

The experience of a few pioneering organizations reinforces the notion that many nonprofits should
consider the capital market as a source of financing, Across the country, analysts are finding examples
of nonprofits preparing themselves to access these dynamic capital markets. They employ the use of
internet technology and new software programs to modernize their operations and efficiency. They use
financial technical assistance (FTA) to assist them in competing for capital. They are also planning on
using the New Market Tax Incentives to appeal to yet a broader base of institutional investors.

A number of foundations and socially motivated investors such as Ford Foundation, Rockefeller
Foundation, F.B. Heron Foundation and others have provided operating assistance and technical
assistance grants. They have invested in tools and models to help nonprofits improve their access capital
markets. These tools increase an NPO’s capacity and serves to leverage the foundation’s grant. Their
investments have achieved promising results suggesting possible solutions regarding the capitalization of
hard-to-finance economic and community development assets in the capital markets. Organizations that
have effectively made use of these approaches include:

Figure 1.

 Self-Help Inc., a prominent CDFI which originates and packages of mortgages from
the low/low income housing communities in the south. Durham, North Carolina.

 Greyston Foundation, Greyston Bakeries, a successful Yonkers, NY based CDC and

social business venture and low-income housing. Used capital markets finance for new

 Greenpoint Manufacturing & Design Center (GMDC),a community development

corporation nonprofit in Brooklyn, NY which operates industrial incubators with
shared manufacturing equipment.

 Community Reinvestment Fund, a Minneapolis MN based nonprofit which has

pioneered the use of securitization of CDC, CDFI and government assets, thereby
providing greater liquidity to the NPO community.
 Sustained Excellence Awardees (SEA Corp), a consortium of nonprofit real estate

 Brooklyn Navy Yard, nonprofit offering below-market real estate space for low-
income minority and non-minority small manufacturing and low tech businesses.

 Coastal Enterprises, Wiscasset, Maine, CDC providing incubator and offering

venture funds for distressed communities within the state of Maine.

 Southern Mutual Help, New Iberia, LA, low-income housing in rural poverty zones.

 Accion International: Latin American micro-lending ; funding micro entrepreneurs

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Four conditions must be met if nonprofits are to access market-rate capital:

(1) The first condition is that any meaningful financial technical assistance between Wall
Street professionals and NPO senior management can exist only if the NPO has bankable,
financeable assets. These assets must generate predictable and measurable cash flows
sufficient to service some form of debt or meet investor’s expectations.

(2) The second condition is that successful transactions with for-profit capital markets occurs
when NPO’s management is willing to learn about market rate financing techniques and
demonstrate familiarity with the discipline of structured finance and debt technology.

(3) Thirdly, capital markets access (CMA) for any NPO requires a top-down mandate from the
board and executive management. Senior management must know about relevant financing
structures, debt instruments and overall financial management systems.

(4) Finally, a nonprofit’s Board of Directors would achieve greater impact if it does so acting
in concert with the careful drafting and implementation of a strategic long-term business
and financing plan. This business plan should be vetted by for-profit market professionals
to determine whether the plan reflects the realities of the market for the NPO’s specific
current or future initiatives.

While these conditions are not out of reach for many community development organizations that could
benefit from a new source of financing, there is a knowledge gap that stands in the way. Most nonprofit
senior management will concede they do not know how to tap into the public or private capital markets
as a stable source of financing.

Few nonprofit CFOs have ongoing institutional financial relationships. Fewer still develop relationships
with Wall Street underwriters, structuring agents (e.g. the rating agencies such as S&P or Moodys), or
capital market representatives. Even when a nonprofit has a relationship with a bank or lending group
(usually a CRA-driven entity), that “banker” is not equipped or knowledgeable enough to ‘cross-sell’
any of the bank’s other capabilities such as public or structured finance, or even access to the bank’s
private clients. NPOs unfortunately seem to know and access only one narrow door to the capital

The rest of this paper is devoted to closing that knowledge gap. It provides a primer for community
development organizations on how to better use the debt instruments and financial technical assistance
of the capital markets.

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Sources of Capital – Progression from Grants to Public Debt

As an organization grows and matures, its sources of capital change, putting upward pressure
on its existing financing infrastructure. Patient capital for early operations evolves to demand
longer term debt and equity financing that appeals to a broader group of funding sources and is
met by stable cash flows. Usually management’s level of sophistication and expanded banking
and finance relationships provide increased exposure to the various aspects of the capital
markets. Hopefully during this evolutionary process, the NPO develops multiple sources of
capital so they never are at risk with only one source.

Financing sources available to NPOs follow a logical progression and maturation from grants
and angel funding to bank financing. Increasingly, the larger more evolved NPO seeks multiple
sources of capital through the established capital markets in the form of debt securities, private
placements, participations or some form of structured finance which is attractive to institutional

The schematic below highlights the various stages or evolution a NPO passes on its way to the
capital markets.

Figure 2.

Invest. Banking

Investors only

Social / Financial
return investors.
rate sources)

Money Center Multiple Bank

Bank’s Com. Dev. relationships for
Dep. (CRA loans other credit
bank lines & facilities

Philanthropy –
Foundations &
(Grants, PRIs
and Subsidies)

1 2 3 4 5

An in-depth discussion of NPO capital markets is in “The Nature of Returns,” available at
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II. Improving Credit Quality with Credit Enhancement

Credit enhancement is potentially the greatest equalizer between for profit and nonprofit capital market
transactions. Credit enhancement is defined as a provision that is added to a transaction in order to
protect investors from a possible default by the issuer. As its name suggests, it enhances the credit
quality of the assets by raising them from an un-rated or a low credit quality to a higher or investment
grade quality.

Financial engineers from Wall Street firms attempt to structure debt security to meet the needs of both
the borrower and lender. As a function of improved credit quality, the underwriters try to improve the
debt coverage ratios (i.e. the number of times cash flow covers interest or principal and interest
payments on the outstanding debt) by placing sufficient subordinated or cushion debt below the senior
loan, in a Senior Loan /Subordinated Loan structure. Collectively, these financial engineers have
developed an array of techniques to structure debt that offer borrowers a number of benefits such as:

 lower cost of capital,

 diversified funding sources,
 liquidity,
 off-balance sheet financing, and
 improved returns on capital.

This is achieved by carving up the cash flows of revenue producing assets and shaping it to meet
specific maturity and credit needs of institutional investors.

The financial engineers, by using a variety of credit enhancement techniques, can assist an NPO to
“borrow” the credit quality of an investment grade financial guarantor (usually through payment of a
negotiated premium) to expand its capital structure options. These structures are the basis for a financial
product or security that raises the credit quality of the debt by subordinating its PRIs, government
subsidies, or just a portion and priority of the assets’ cash flows.

Figure 3: A schematic of a debt security with subordinated tranches that serves as credit enhancement.9

Senior Loan or
Tranche “A”
a portfolio or pool of assets
receiving the first priority in cash
flows to pay down principal and
interest (P&I) (called a Tranche)

Subordinated Debt tranche

receiving the cash flows only after A tranche is paid
down sufficiently. Usually less than A rating (“B” )
. This Tranche is considered a First Loss
Equity tranche (“C”)
The Schematic depicts the senior subordinated tranches of a debt transaction and the ‘waterfall’ or priority of cash flows. 1) The senior or “A”
tranche means the first cash received from the assets would go to pay down the senior tranche or loans. These loans usually have a shorter
maturity, and the investors in the first tranche have an undivided first perfected security interest (FPSI) in the assets, cash flow or revenues of
the assets. 2) The Subordinated “B” tranche is the subordinated tranche, which receives second priority in the cash flows. The subordinated
tranche or first-loss guarantee offers investors in the senior tranche a higher degree of probability that the loans will not default.

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The following pages will highlight how the critical debt structuring process remains an important and
necessary tool for nonprofits to form ‘homogenous’ capital markets debt products through the use of
credit enhancement.

There are generally five (5) types of credit enhancement, used either singly or in combination. 10

They are:

(1) Credit insurance or loan insurance provided by a mono-line bond insurer, insurance company
or financial guarantor such as ACA, Inc. Swiss Re, or AIG.

(2) Over-collateralization or subordination such as the ‘A’ senior tranche followed by the
subordinated ‘B’ tranche.

(3) Cash collateral accounts or reserve accounts whereby a cash account is set aside with enough
funds to pay at least one year of principal and interest on the loans or bonds.

(4) First-loss guarantees—a subordinated tranche that is equal to a multiple of the company’s
three-to five-year worst case experience.11

(5) Excess spread accounts that maintain the excess spread in a cash account which is set aside for
the timely payment of the interest in case there is a shortfall.

Many Different Forms of Credit Enhancement.

There are many combinations and permutations of the various credit enhancement applications to pool
assets and form a debt instrument. But there is one common element to each type and that is the issuer
or borrower must package their financeable assets to meet the threshold or minimum credit quality of
the investor. That is why the borrower goes to great lengths to determine the most cost-effective way to
get to the threshold for a target institutional investor group. The first-loss guarantee is one of the most
common forms of credit enhancement.

The amount of each first loss guarantee (FLG) varies, but usually represents 5 percent to 10 percent of
the total funding amount or enough to cover a multiple of the issuer’s worst-case default or delinquency
experience. Most of the time, the amount of the FLG is determined either by an insurance company or
financial guarantor who may be providing a credit wrap around the whole or part of the transaction.
These financial wraps in combination with FLGs raise the credit quality of the assets to an acceptable
investment grade level from the lowest investment grade rating of ‘BBB’ to the highest investment
grade rating of ‘AAA’ by Standard & Poor’s Inc.

Of these five, the most common are the over-collateralization, and credit insurance forms of credit
enhancement. As mentioned, some transactions use combinations of some or all of these forms of credit
support. This is a function of the underwriters and the rating agency requirements, if applicable.

The most expensive form of credit enhancement is the financial guarantee provided by a third party
financial guarantor. The issuer is required to pay for the credit enhancement financial guarantee which
Credit Enhancement published by Financial Securities Association
“Securitization” by Steven Schwartz, an article written by bond counsel to new issuers of asset backed securities, 1994.
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provides investors with the guaranteed timely payment of principal and interest, thereby making the
transaction default proof.

Third-party guarantees and letters of credit are the most common strategies that capital market
participants use to bolster the creditworthiness of their offerings. Sometimes, financial guarantee
providers write financial guarantee policies like any other insurance company--only they are not
providing property, casualty, or life insurance. Instead, they provide financial insurance that assures
payment of principal and interest on the debt instrument.

Custom tailoring the Credit Enhancement Process for Practitioners:

While the many types of credit enhancement offer a range of choices to for-profit issuers, most NPOs
that own assets that are less predictable may require additional forms of credit enhancement which can
only be supplied by the socially motivated or philanthropic capital participants. For this reason we
coordinated several roundtables and seminars to study and review the roles and opportunities for credit
enhancement at the Intersection of Wall Street, Philanthropy and NPO Issuers.

To learn more about how credit enhancement techniques could be applied to nonprofit assets, the Capital
Markets Access Program (CMA) organized two Credit Enhancement Roundtables. The first roundtable
was held at Pocantico Conference Center hosted by the Rockefeller Brothers Fund on December 7, 1999.
The second roundtable was held during the National Congress for Economic Development (NCCED)
Annual Summit in Washington, DC in April of 2000.

Credit Enhancement Roundtables.

The roundtables focussed almost exclusively on problems and possible solutions with monetizing pools
of these small business loans originated by CDCs, CDFIs and CDCUs. These roundtables also explored
how credit enhancement might be structured into a transaction to improve credit quality and therefore
become more interesting to potential institutional investors. Members of the roundtable discussed how
socially motivated capital, government and philanthropic grants might be employed as a subordinated
tranche that is effectively the first loss guarantee or cushion in a transaction.

Attendees included senior staff from major Wall Street firms, insurance companies, foundations, as well
as representatives from relevant federal agencies (the Small Business Administration, the Department of
Housing and Urban Development, the Economic Development Agency, the US Department of
Agriculture, the Department of Commerce and the Treasury Department) and the White House’s New
Markets Initiative.

Participants from these roundtables studied the issues and opportunities around credit enhancement for
NPO issued debt or financial products. They identified the following critical issues and offered these
suggestions and recommendations: 12

Roundtable Observations:

Observations from the roundtables in New York and Washington D.C included:

(1) Low-income markets are still under-served. An informal survey of the participants found that
most acknowledged low-wealth communities funded by the CDFIs were consistently under-
served with small business loans, especially the needs of local minority businesses. A majority
of the roundtable participants believed that CDFIs did not have a market acceptable system to
track loan performance


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(2) CDCs and CDFIs need to improve financial communication skills because nonprofits and Wall
Street fail to hear each other. Among the participants, there was unanimous acknowledgement
that there needs to be a two-way exchange between borrowers and lenders as equals.

(3) CDFIs need to develop a market-acceptable standardized loan origination system. A majority of
the attendees believed that CDFI loan originators need to mirror for-profit issuers in terms of
systems and processes, albeit with the different underwriting characteristics i.e. character based
lending versus credit scoring. These professionals emphasized a need to improve the loan
performance data tracking system that better records the loan performance, defaults, and
delinquencies, collection and servicing processes. This could be done either directly or by
subcontracting out these activities.

(4) Nonprofits need to know how to perform a critical self-assessment -a through financial review
of their own systems in order to withstand the usual and customary due diligence scrutiny which
most institutional investors would require of them. The major self assessment process would

• A complete review of their business fundamentals and an analysis of three to five years of
profitability, revenues and expenses.

• A conservative assessment of growth prospects & vulnerability to retraction of subsidies

and grants.

• Review projected cash flows and vet their business strategy with market professionals.

• Evidence a system for monitoring and troubleshooting the billing procedures, credit
collections policies and procedures as well as the payment terms, and estimating the
default rate.

The two most important attributes that a debt instrument or financial security must have to appeal to the
institutional market-rate investor are 1) acceptable credit quality and 2) of sufficient size to be a
meaningful investment in their portfolio. These attributes are critical in originating and structuring debt
products from the NPO sector. The above-mentioned credit enhancement discussion must take place
within the discussion and context of the NPO assets origination process. Scale is achieved only through
pooling together similar type issuers to create sufficient size for a transaction to be economical to both
issuer and investor. That is why the previous ‘Credit Enhancement’ Section and the next section of
‘Pooling Mechanism to Realize Economies of Scale’ must be considered and studied together.

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III. Pooling Mechanism to Realize Economies of Scale

While credit enhancement can make the “quality” of nonprofit assets attractive to capital market
investors, the smaller size of those assets may reduce their appeal. Institutional investors have a
minimum size in which they are willing to invest. Though it varies from institution to institution, there
is strong investor appetite in the smaller size, private placement range of $3-$10 million. While many
nonprofits would have difficulty reaching this range alone, they could achieve that scale easily as a

A technique that has been used in other contexts—and could be adopted by nonprofits—is a pooling
mechanism. A pooling mechanism would aggregate a group of CDFI’s assets such as their small
business loans. This would create sufficient scale to structure a transaction whose size is of interest to
institutional investors.

Figure 4. gives an example of the effect of aggregating small business loans for regionally contiguous
CDFIs - in this example, CDFIs serving rural poor and distressed communities in Louisiana and
Mississippi. By grouping the loan portfolios of four CDFIs, these groups together would be able to
package these loans as a structured financing (perhaps with some form of credit enhancement provided
by philanthropy or other socially motivated financial guarantor) and monetize them by selling them to
an institutional investor(s). They would realize several immediate and quantifiable benefits such as
lowering the cost of funds, lowering the transaction costs, reaching an institutional investor base that
they never had access to before, and attracting a more consistent source of capital to their missions.

Figure 4: Sample Portfolio for pooling

CDFI # CDC/ CDFI Organization Amt $ (mm)

1 New Orleans, LA: Community Group 3.6
2 Mississippi: Greater Services Inc. 2.3
3 Baton Rouge, LA: City Invest. Funds 3.5
4 New Iberia, LA, Southern Mut. Self-Help 2.6
1-4 Total 12.0

Currently, there is a compelling case for CDFIs to collaborate to develop a pooling mechanism for their
CDFI loans, whether they perceive a need for liquidity today or not. It takes several years to ready an
organization for issuing in the markets because their systems and loan histories have to meet standard
underwriting criteria. This cannot be achieved overnight. Nor can it be designed without direct
involvement with Wall Street firms, investors and underwriters that have developed and perfected these
origination and issuing processes over the past 15 years.

Perhaps funders, practitioners and market participants could work together to determine how best to
guide this NPO sector to create a replicable pooling mechanism for the largest RLFs and CDFIs to the
smaller ones. According to National Community Capital Association’s (NCCA) annual report,13 the
CDFI community includes approximately 300 separate and distinct financial intermediaries situated
around the country serving both rural and urban distressed communities.

CDFIs: A Market Ready for Pooling.

Information gathered from NCCA literature and from several NCCA annual conferences. Both anecdotal and written reports.
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The aggregate assets of small business loans is approximately $ 4 billion, with $ 2 billion concentrated
in the largest 50 CDFI members of the NCCA trade association. Unfortunately the small business loans
originated in distressed communities by the many individual and uncoordinated nonprofit financial
intermediaries such as CDFIs and Revolving Loan Funds (RLFs) do not have a similar ‘Fannie Mae’
type pooling mechanism or infrastructure to aggregate their assets. This renders each of these nonprofits
unable to take advantage of economies of scale offering lower transactions costs and possible lower
interest rates. It further provides a diversity of loans geographically and by loan size so that there is not
any concentration risk to potential investors or lenders.

Without the appropriate origination infrastructure or pooling mechanism incentive for CDFIs to pool
their assets or monetize loan portfolios, this subset of nonprofit practitioners would not be able to
advance to the capital markets with its scale requirements

Given the current state of affairs, it may be several years before CDFIs as a whole meet the scale
requirements to participate in the capital markets. They would need, for instance, to have accumulated
3 to 5 years worth of reliable data on their assets’ performance before they could be seen as investment
worthy. There is little doubt, however, that developing pooling mechanisms in addition to credit
enhancements would allow community development organizations to access financing from the capital

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IV. Removing Obstacles to Accessing Capital Markets

In order for NPOs to access the capital markets or be frequent borrowers, they need to understand and
address the obstacles they currently confront. These obstacles fall into three categories:

1) obstacles caused by unfounded perceptions and myths NPOs hold about the capital markets,

2) obstacles encountered due to lack of experience, knowledge or understanding of major

principles and responsibilities for issuing and borrowing market rate capital, and

3) obstacles encountered due to NPOs inability to hire skilled financial management or

implement basic systems necessary to demonstrate sufficient capacity and safeguards that
would give investors a high degree of confidence in the NPO.


The first obstacle to address is the myths that some NPOs believe about the capital markets in general.

Myth #1:

Philanthropy and government grants will always underwrite their operations. While the NPO’s mission
may be seen as very important, it may only be important to certain funders for a finite period of time.
The long term outlook for short term grants is that it requires the NPO to remain dependent upon the
annual proposal for annual grants, but offers no guarantee for long term funding.

False: Philanthropy and socially motivated capital have finite resources and an ever increasing number
of requests for their attention and capital. They are usually not the NPOs long term operating capital
underwriter. The stark realities for many in the for-profit sector is the same as the nonprofit sector.
There is significant competition for too few investment dollars. Those who meet investors’ needs are the
ones able to attract financial and human capital - they survive. Those that do not, ultimately, cannot
survive. Of course this represents the harsh world of the fierce competitive supply and demand for
capital. Sooner than later, these harsh realities forces its way into the NPOs’ world. NPOs are asked to
prepare for the future like for profit companies; they must move on from funding to self-financing
business models.

Myth # 2:

NPOs have to develop new financing models. Many believe a new paradigm must be developed since
they have historically been unable or willing to exploit the potential of traditional capital markets.

False. The capital markets have developed many financial products that respond to just about every type
of asset class (i.e. mortgages, loans, receivables, intellectual rights, contracts, payment streams, etc.)
For even the most unique NPO, there is no need to invent anything new. Whatever form the nonprofit
cash flows or assets may take, the for-profit capital market has probably seen it before. The templates
exist – they simply need to be tailored to the unique repayment characteristics, cash flow and asset type
of nonprofit organizations.

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Myth # 3:

For a nonprofit organization to secure funding in the capital markets it must compromise its mission
and risk sending the wrong message to its stakeholders. Some non-profits are philosophically opposed
to the capital markets. They believe Wall Street carries values contrary to their social mission and
manner of doing business.

False: It is true that the capital markets work off the free market principle that the most efficient
borrower pays the lowest cost of funds and that Wall Street is not swayed by a mission or variables
which cannot be quantified. To dwell on this fact, however, confuses the “integrity” of a nonprofits’
work with their need for and ability to secure alternative capital funds. Seeking multiple sources of
financing has never compromised the core mission of any nonprofit.


The next major obstacle to the capital markets is nonprofits’ lack of basic knowledge about the steps in
issuing securities or debt through underwriters, investment bankers or broker dealers. The steps are part
of the logical skill set and organizational capacity market participants need to master before considering
borrowing money in the public markets. This is true for both for-profit and nonprofit borrowers alike.

Only by mastering the origination, pooling and packaging of assets can an NPO become a viable
potential issuer. The rating agencies have written extensively about the skills and capabilities necessary
to issue various types of securities.14

NPOs lack familiarity with common finance language used to describe debt instruments and credit
enhancement vehicles, as well as basic bond math and financial return analysis. Usually, NPOs do not
understand “Wall Street Speak” and vice versa. In order to become a credible participant and borrower
from the markets, NPOs need to understand the terms of the trade, common usage of terms, and
definitions of acronyms. (N.B. a brief glossary is included n Appendix C).

There are eight major steps for bringing assets to market as outlined in Figure 2a. These include the first
step - origination process of assets through to step eight - the ultimate selling of a financial product and
ongoing servicing of the assets. The eight steps are as follows:

Figure 5

1. Originating assets which conform to established underwriting criteria. Most asset

classes have standard underwriting criteria that make it easier to package and sell. For
example, trade receivables must have a common delinquency standard, or small business
loans must have standard loan documents so the packaged portfolio can be analyzed on an
‘apples to apples’ basis.

2. Structuring a debt instrument which meets investors parameters. Investors want

securities which have a certain maturity (i.e. 3 year debenture or note). They have a
minimum credit quality that they can invest in such as BBB or A securities, They may also
have restrictions on concentration of assets ( cannot invest in portfolios too heavily
concentrated in one type of asset or geographically located in one particular area, zip code
or tract or state.

S&P, Moodys have written a number of articles such as ‘First Time Issuers’ and ‘Red Flags for New Issuers’
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3. Aggregating similar assets through cooperative issuance or pooling mechanism. Since

it takes the same amount of time for an investor to analyze a small deal versus a larger one,
they tend to have minimum size requirements, because it would be uneconomical to
analyze a $ 100,000 private placement than to review a $ 20 million private placement.
Since these investors have enormous resources to invest, they can only concentrate on those
which are a minimum size. Since the NPO assets are usually much smaller than a for-profit
issuer, they would be overlooked by many investors if they can’t achieve a minimum
issuance size.

4. Warehousing loan or assets until ready for market. Since the timing of when certain
assets are ready and able to be packaged for sale is never uniform or date specific, for-profit
issuers have developed a ‘warehousing of assets’ capacity. This process is just like
warehousing packaged goods until a full order is ready to be picked, packed and shipped. A
warehousing facility allows the issuer the time and facility to gather enough assets to make
an appropriate-sized issue.

5. Credit enhance to achieve desired credit quality through first loss guarantees. Either
through the use of first loss guarantees, standby letters of credit, a third party financial
guarantee, a senior/ subordinated structure or a combination of these CE methods, the
issuer and its underwriter look to the credit quality standards put forth by the rating
agencies to determine what is necessary for the cash flows from their assets to pay down
the debt in a borrowing. Credit enhancement is used in all types of fixed and floating rate
debt instruments from mortgages, small business loans to trade receivables and future

6. Packaging the debt instrument for underwriting. This requires that a potential borrower
has an asset or portfolio of assets, once selected, perhaps picked over or “creamed” from
the best assets from the pool, that will withstand the scrutiny of investors. By hiring an
investment banking or underwriting firm to perform the due diligence, structure the cash
flows into a financial product (that they have a high degree of confidence that their client
investors will purchase), the issuer is looking for the best packager of their assets. That
means it secures the most money for their assets and has the demonstrated ability to execute
the transactions and get it sold.

7. Distribute & selling to institutional investors. This is the single most important function
of the underwriter. Their success is determined on their ability to move financial product
with institutional investors with whom they have a strong working relationship. Examples
are the larger firms such as Morgan Stanley, Salomon Smith Barney, CS First Boston.
Goldman Sachs, ING Barings, JP Morgan Chase, Fleet Bank, Bank America, or the smaller
niche firms such as Sandler & O’Neill, Ormes Capital, Jackson Securities, Advest,
Williams and Co. or Robertson Stephens etc.

8. Servicing assets; reporting performance. Investors rely on the issuer to have acceptable
reporting systems, that provides true, accurate and timely performance data. Servicing the
assets requires that the issuer have effective collection procedures in place. Most of the
smaller originators outsource their servicing functions to recognized companies if it is cost
effective. This serves to satisfy some of the investor’s concerns for the smaller issuer. It also
saves the issuer from having to hire and support the overhead of an in-house servicing
capability if it is not necessary.

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Another obstacle for NPOs to address is whether they have sufficient capacity or acceptable accounting
and internal audit systems to be considered as a borrower by institutional investors. While many NPOs
find the idea of trolling for capital alluring, the markets demand strict adherence to standard operating
procedures and reporting mechanisms. This reality eliminates NPOs not ready or willing to comply
with such standards. The basic capacity which any organization, for profit and nonprofit, must master
includes the ability for:

 establishing a basic accounting control systems that is recognized by GAAP

 streamlining the origination process
 documenting asset performance accurately
 understanding the financial engineering of debt instruments
 coordinating the marketing process to investors.

The nonprofit CFOs have entered a more dynamic financing world requiring new abilities and courage
to take the appropriate actions ensuring their organizations’ long-term financial viability and survival.
Here we require CFOs to act as “real change leaders” and represent the future of nonprofit management.

The degree to which NPOs are successful in securing additional capital will be a function of two things:

(1) attracting real change leaders and adopting a philosophy into the organization that rewards
innovation, application, and “real change management”. This incorporates a working knowledge of
the most appropriate structured financial engineering techniques for their specific asset types, and

(2) transforming their assets to look or perform similarly to their for-profit “twin”.

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V. Conclusion: Realistic Next Steps and Recommendations

So far, we have looked at the needs that might motivate community development organizations
to seek capital market financing, and we have described some of the challenges and
opportunities they would have to consider. In this section, we outline some of the specific steps
that need to be taken in order to proceed to the capital markets.

Figure 6: Determining Where Your Organization Is Now--A Rigorous Self-Assessment

Problem Solution
Identify alternative sources of capital;
1 Funding sources are too concentrated in urge CFO to develop other capital &
philanthropic and government grants banking sources.
Form financial advisory board and seek
2 No knowledge of the capital markets access to local financial technical
Hire real change leaders to prepare the
3 Lack of qualified finance staff to proceed NPO to proceed with market options

Form pooling mechanism for similar

4 Lack of economies of scale and capacity type assets such as local or regional
CDFIs or NPOs with brownfield real
estate or CDCs with health care contracts.
Use foundations as conveners. Foun-
5 Lack general knowledge about market rate dations sponsor specific finance skill
capital Workshops & Skill Seminars teaching
practitioners the basic financial skills
offering practitioner workshops for 8 / 10
similar organizations at a time.
Develop 5 year bus. plan: vet w/ market
6 Unable to determine an org.’s financing needs participants; Work with local finance and
accounting volunteers to craft the plan.
Get organizational buy-in. Add directors
7 Board of Directors or advisors to Directors to help them
understand all the pros and cons for their
organization to access market rate capital.
Perform self-assessment; inventory all
8 Don’t know whether NPO is ready for debt organization’s assets, skills & capabilities,
short term and long term goals. Know the
true status and capabilities.
Adopt standard operating procedures.
Adopt standard credit, collections policies
9 Insufficient financial controls and accounting and procedures. Adhere to the standard
systems market requirements for tracking asset
delinquencies or defaults.
Confront the naysayers and embrace
10 Many NPO peers or employees may resist those employees who can help your NPO
change. Misusing the terms in the Capital achieve the most financial flexibility and
Markets. knowledge about capital markets access.
Use the commonly held definitions for
capital market instruments.

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The following represents a summary of the steps necessary for any organization to advance to the
capital markets and the requisite skills required to perform competitively.

Figure 6.a
The Steps to Develop Organizational Capacity
Establish the Complete 5 years Use Technical Change Establish
Buy-In from the business plan and Assistance and Institutional standard
Board and execute foundations as Mindset operating
senior Feasibility conveners to procedures
management Analysis learn market

1 2 3 4 5

The Skills to Master and Specific Steps to Get Financing

Learn the Credit Know and Prepare Understand the Perform Complete Self
Enhancement for the Due Basics of Financial Scenario Assessment of
Process Diligence Process Engineering Analyses: NPO’s business
Distressed & operations
Worst case

Steps to Prepare the Organization

The following are several suggestions and recommendations to NPO management who are
contemplating advancing to the capital markets.

Step 1: Getting Buy-In.

Senior management should make a commitment to understanding the capital markets finance process at
the Board Level and form a financial advisory board comprised of an investment banker, capital markets
or structured finance engineer, a community development banker and an institutional investor, and
underwriting professionals.

Step 2: The Feasibility Analysis and Plan for Pooling.

NPOs should form a regional task force to explore and analyze the origination process of similar type
assets and study the potential for an appropriate pooling mechanism. Following, the analysis, the NPO
should develop a strategic three or five year capital markets financing plan.

Step 3: Using Technical Assistance to your advantage.

Wherever available, access financial technical assistance or build your own from local financial
institutions to learn alternative ways to financing your organization’s business. Identify managers or
advisors with capital markets technical assistance who have historically been in the for-profit

Foundations have a number of potential new roles throughout this process. The most important one
being organizers or conveners of grantees with same type assets to facilitate the learning process and
practitioner education. Foundations could expand their current role to help maximize the replication and
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learning process of capital market techniques that applies to their grantees. Perhaps a foundation or
groups of foundations can fund a community development finance curriculum at local colleges and
universities. Foundations could also be investors in the subordinated tranche or may learn how to
become the subordinated first loss guarantee portion of the transaction.

Step 4: Changing Institutional Mind Set

NPOs need to change their institutional mindset by

 bridging the disconnect,

 overcoming language barriers, and
 learning the real opportunities available to the NPO.

Practitioners can improve their access if they just learn the language of the capital markets. A nonprofit
most often does not use the commonly accepted capital market terms and vocabulary making it difficult
for Wall Street and other market rate capital providers to understand the true financing needs and
issuance capabilities of the practitioner. Practitioners can improve their access to capital markets by
building trust and relationships with Wall Street to the NPO’s advantage.

There is an ongoing need to build trust between practitioners and Wall Street - the capital ‘haves’ with
the ‘have-nots”. This was highlighted by a recently completed study by Jessica Lauffer of Lauffer
Associates Hidden Agendas: Stereotypes and Cultural Barriers to Corporate Community Partnerships
[commissioned by the Ford Foundation’s Corporate Involvement Initiative ]15 This study looked at the
major barriers between the leaders in community development serving distressed communities and
business executives. It exposed the significant “linguistic barriers that often prevents the establishment
of effective business community partnerships and the successful repositioning of distressed

By changing an organization’s mindset and attitude toward change opens up the NPO to many more
financing possibilities and helpful relationships This is achieved in part by eliminating those practices
and people that unnecessarily obstruct or greatly inhibit the NPO from the benefits of the capital
markets. Occasionally, there are the ‘naysayers’ that oppose capital markets debt financing for
nonprofits. There are those who may be frightened of change. Most frequently, they are fearful because
they feel that they don’t know enough to ask the right questions.

Step 5: Establish standard credit policies and procedures

NPOs should adopt stringent credit policies that mirror for-profit companies. This increases the
likelihood of being accepted by the capital markets as potential issuers. There are also standard and
generally accepted accounting and collections reporting procedures on loans and underwriting. The
more the NPO adheres to the accepted standards, the more its financial data and business will be
understood and accepted by potential underwriters and investors. NPOs need to adopt standard
operating procedures for loan origination, monitoring and underwriting as it relates to CDFIs, revolving
loan funds, and other financial intermediaries which provide small business loans. Lack of such
procedures is a major impediment to capital markets access as well.

Report Hidden Agendas: Stereotypes and Cultural Barriers to Corporate-Community Partnerhsips, Jessica Laufer, Laufer & Associates La,
Leveraging Win - Win Partnerships in the New Economy, Results from the Foundation Commissioned Study, Hidden Agendas: Stereotypes
and Cultural Barriers to Corporate Community Partnerships, Ms. Jessica K. Laufer, CEO, Laufer Green Isaac, May 15, 2000
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Specific Steps for “Going to Market”

Step 1 Learn how to Quantify Credit Enhancement Resources and Transaction Needs.

The first step is to assess the amount and type of credit enhancement that the NPO may have at its
disposal and may be required by the contemplated transaction. Determining the amount of credit
enhancement that a typical transaction may require is done by estimating the expected potential loss of
the pool of assets or the ability to repay the loan. This is based on past 3 – 5 year history and actual
default experience.

Step 2 Understand the Due Diligence and Credit Review Processes.

It is vital that the NPO management understand all aspects of the credit review process as it relates to
them. Consult the major rating agencies. They have put together a standardized due diligence process.
Standard & Poors, Moodys, Fitch / Duff & Phelps all have published criteria to assess credit strength
and tests for creditworthiness. These are available by contacting each rating agency’s research offices.
[See summary of the “Due Diligence Criteria” below].

Step 3 Understand the basics of financial engineering.

NPOs should have a working knowledge about generic asset-backed or finance structure and which
works better for their types of assets. There are a number of easy-to-understand books and manuals for
the lay person which discusses the various pros and cons of debt structures for structured loans, bonds,
or asset-backed participations. The tools and people are available to any NPO willing to learn the
benefits of financial engineering.

Step 4 Perform Worst Case Scenario Analyses on your own assets.

The credit analysis process is vital not only to determine whether the borrower may default on this
obligations, but also highlights the true business risk. This distressed analysis not only allows financial
engineers to determine how the loan can be structured to prevent default, but also shows NPO
management how certain external or internal changes affects their bottom line or their ability to repay
their debt. While the analysis is both quantitative and subjective, financial ratio analysis has proved
sufficient to predict financial distress with impressive accuracy.

Credit quality assessment by any rating agency is based on the weak link theory. That is ‘whatever had
been the borrower’s worst experience before would more than likely happen again.” Therefore any
transaction must be insured to that minimal worst-case experience. Once the worst-case scenario has
been modeled, the credit enhancement levels are determined based on a “multiples of worst-case”

Step 5 Self-Analyze your financial health and business operations

This is the single most important credit review process because it determines whether the potential
borrower can issue the debt at the scheduled interest rate. This self-assessment should also answer these
basic questions about operational, financial, and management issues.

1) Business Strategy Analysis: What is the borrower’s business? How does it work? What
is the strategy for sustaining or enhancing the value of the business?

2) Accounting Analysis: How well do the firm’s financial statements reflect its underlying
economic reality? Are there reasons to believe the organization's performance is stronger
or weaker than reported profitability would suggest?
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3) Financial Analysis: Is the organization's profitability, cash flow, or surplus unusually

high or low? What specific risks are associated with the operating profit stream? How
leveraged is the organization? How much senior or subordinated debt is already

4) Perform Internal Ratio Analyses This analysis compares for-profit companies in a

number of categories. Most basic researchers study companies by looking at basic ratio
analysis and comparing those ratios with companies in the same SIC code, geography, or
similar product or service area. Ratio analyses includes the important debt coverage ratios
– the number of times that cash flow covers debt repayment, as well as financial health
such as: minimum liquidity ratios, current ratios and inventory turnover ratios.

Nonprofit organizations seriously preparing long-term financing plans for their organization must look
at the viability of their operation and the reliability of their current funding sources. In competing for
resources and position, real change leaders scrutinize their business practices, technical skills, and
financial capabilities practices, which either advances or obstructs their mission before they proceed.

Getting Serious About Accessing the Capital Markets.

In conclusion, if a NPO decides that alternative sources of funding are a priority for their organization,
they must be ready, willing and able to devote the people and organizational resources necessary to
training their management teams and staff about the operating procedures that needs to be incorporated
into their daily organizational life and followed. It also means that an NPO is prepared to adopt a
mindset of organizational readiness and preparation for financial autonomy.

Figure 7: Checklist for NPO senior management

1 Completed realistic, long term business plan and financing plan. The plan
should be vetted by market professionals, investors, and strategic advisors.

2 Formed finance advisory board. received board of directors buy-in

3 Hired talent (real change leaders) with the market based skills necessary to
review and execute capital market funding options

4 Accessed Financial Training Assistance; attended workshops convened by

foundations and university to develop specific finance skills.

5 Identified and accessed credit enhancement providers, subordinated debt

investors and third party and socially motivated guarantors for the subordinated

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6 Understand all financing options available to nonprofit organization. Assessed

the pros and cons of each option

7 Established standard operating procedures such as credit and collection

procedures, performance documentation etc.

8 Identified / developed several new reliable financing, banking and underwriting


9 Monitored the performance of assets, systems, management and progress

against plan and systems.

10 Develop working partnerships with corporate and financial mentors.

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Accrued interest Interest earned on a bond from the last date interest was paid by the issuer to the present.

Agent Someone who acts on behalf of another. Traditionally, insurance company salesmen have often been called
agents. This has led to a certain amount of confusion since in some situations they are acting on behalf of the client
and at other times they are acting on behalf of the insurance company: the distinction is not always clear.

Asset Backed Securities: Asset-backed securities represent securitized interests in a pool of assets. Issues have been
backed by credit card receivables, auto loans and other forms of consumer installment loans. Investors receive
monthly payments of principal and interest. All principal and interest payments flow directly to investors. Securities
backed by revolving credit lines, such as credit cards, may delay distributing principal during a lockout period.
During that period, principal cash flows are reinvested in additional receivables. Once the lockout period is over,
principal flows to the investors. The rate at which asset-backed securities pay down principal, as well as their ultimate
maturity date, is uncertain. This is because principal cash flows depend upon the rate at which individual consumers
decide to prepay their indebtedness.
Bonds Bonds, otherwise known as fixed-interest securities, bonds are basically IOUs which are issued by
governments, financial institutions and companies. Generally, the issuer undertakes to pay investors a fixed rate of
interest for a fixed number of years (e.g. 7% for 5 years). The fact that the interest rate is fixed makes bonds attractive
because their return is so predictable. Bonds are traded in open markets, in the same way as shares.

Capitalize: When an organization takes risk—be it the risk of a new venture or perhaps the risk of proprietary
trading—the institution will set aside capital to support the risk. In the case of a new venture, the capital might be
used to purchase plant and equipment. In the case of proprietary trading, it would be set aside to assure regulators,
investors and counterparties that the institution could survive adverse performance. With this process, the
organization is said to capitalize the risk.
Collateral Community Funds A type of foundation formed by broad-based community support from multiple
sources: trusts, endowments, individual contributions, private foundations, or corporate grants. A community
foundation generally makes grants only within a specified geographic area and is governed by a board representing
the community it serves. Some community foundations offer donor-advised funds to contributors.

Corporate Bond Companies issue bonds to raise money and pay interest on the bonds. Usually bonds expire on a
fixed date, when the company repays you. You can buy and sell bonds easily (like shares). Bond prices tend to change
when interest rates change and are usually not as risky as shares because a company will pay off all it's debts
(including bonds) before the shareholders get anything.

Community Reinvestment Act. The Community Reinvestment Act is intended to encourage depository institutions
to help meet the credit needs of the communities in which they operate, including low- and moderate-income
neighborhoods. It was enacted by the Congress in 1977 (12 U.S.C. 2901) and is implemented by Regulation BB (12
CFR 228). The regulation was revised in May 1995. Evaluation of CRA Performance The CRA requires that each
depository institution's record in helping meet the credit needs of its entire community be evaluated periodically. That
record is taken into account in considering an institution's application for deposit facilities. Neither the CRA nor its
implementing regulation gives specific criteria for rating the performance of depository institutions. Rather, the law
indicates that the evaluation process should accommodate an institution's individual circumstances. CRA
examinations are conducted by the federal agencies that are responsible for supervising depository institutions. CRA
information on other depository institutions is available from the Federal Deposit Insurance Corporation (FDIC), the
Office of the Comptroller of the Currency (OCC), and the Office of Thrift Supervision (OTS). Interagency
information about the CRA is available from the Federal Financial Institutions Examination Council (FFIEC).

Coupon Coupon states the rate and on what date interest will be paid on a bond, usually semiannually.

Credit Enhancement: Credit enhancement is a provision that is added to a deal in order to protect parties to the deal
from a possible default by another of the parties. "Third party guarantees: A third party
may guarantee the performance of one or more parties to the deal. Alternatively, a letter of credit may be obtained

Definitions of terms, concepts and practices were provided by a number of texts and glossaries, including:, Glossary of
Financial Terms, Dictionary of Financial Terms, Financial, &P’s Structured Finance Criteria, Principles of Corporate Finance,
Foundation Center Directories, PRIs by Wiley, Structured Directory
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from a bank .A drawback of credit enhancements is that they can add to the cost of a deal. For example, when an
institution posts collateral, it incurs the cost of financing that collateral.

Debt service The total amount of money required to meet the annual principal and interest payments when due.
Coverage for revenue bonds, a ratio of how many times the net project revenues exceed the total annual debt service
due in the same period.

Default The failure of an issuer to promptly pay principal and/or interest when due.

Discounted rate An arrangement which gives you a set reduction, or 'discount' off our standard variable rate for a
specified period of time. At the end of the specified period your mortgage rate will change to the standard variable
rate in force at the time. Sometimes there are redemption penalties associated with this type of deal.

Fund Fund is a general term for any investment vehicle which pools together the money of many small individual
investors and invests it in certain markets and securities according to a defined set of investment aims and objectives.
Covers such investments as unit trusts, investment trusts and pension plans.

Fundamentals usually refers to the underlying economic factors affecting a particular market, country or sector and
will include such aspects as industrial output, wages and raw materials costs, currency strength or weaknesses, trade
balance and so on.

High -Yield Bond High-yield bond (sometimes called a junk bond) is a corporate bond which has significant credit
risk. High-yield bonds trade with yields-to-maturity that exceed those of otherwise comparable instruments.
Insurance An agreement under which individuals, businesses, and other organizations, in exchange for payment of a
sum of money (a premium), are guaranteed indemnity for losses resulting from certain events or conditions specified
in a contract (policy).

Interest: The monthly effective rate paid on borrowed money (a loan). Expressed as a percentage of the sum

Market Capitalization the value of a company as measured by the total stock market price of its issued and
outstanding shares. This is calculated by multiplying the number of shares by the current market price of a share. It is
also widely used as a definition of company size - hence, big corporations are usually referred to as large cap stocks
(See also Small Caps

Maturity The date upon which the issuer repays the principal.

Maximum Credit Exposure (Worst-Case Credit Exposure) Maximum credit exposure (also called worst-case
credit exposure) is a statistical risk measure which quantifies the potential credit exposure of a party to a specific
counterparty at a specified time in the future, based on existing contracts with that counterparty. Maximum credit
exposure is calculated at a specified confidence level C for some time T in the future.

Nonprofit (Also Not for profit and sometimes Charitable). A term describing the Inland Revenue (in Britain) and the
Internal Revenue Service (in the US) designations of an organization whose income is not used for the benefit or
private gain of stockholders, directors, or any other persons with an interest in the company. A nonprofit
organization’s income must be used solely to support its operations and stated purpose.

Program Related Investments (PRI) While most foundations make grants to support their programmatic interests,
some funders have developed an alternative financing approach known as program-related investing (PRIs) to supply
capital to the nonprofit sector. These PRIs are charitable investments have been used to support community
revitalization, low-income housing, micro-enterprise development, historic preservation, human services, and more.
Source of Information is provided in Program-Related Investments: A Guide to Funders and Trends. Offering current
perspectives of PRI providers and recipients; a directory of leading PRI providers; examples of more than 550 PRIs

Pooled Investment Fund A vehicle for bringing together the investments of many people or organizations and using
the combined funds to obtain economies of scale and investment management skills not available to individuals.
Examples include unit trusts, investment trusts, etc.

Private Placement: Private Placements are securities, privately placed debt that is negotiated directly between the
company ( issuer) and the lender If the issue is too large to be absorbed by one institution, the company generally
employs an investment banker to draw up the prospectus and identify the possible buyers. It cost less to arrange a
private placement than to make a public issue. The private placement can be custom tailored for firms with special
problems or opportunities. Renegotiating a private placement after some extreme event is much easier with a private
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placement than with a public issue. Private placements usually face the most detailed investigation – due diligence
and may require specialized loan arrangements. Private placements account for approximately ½ of the US bond
placements a/o/1990.

Project Finance: Debt that is largely a claim against cash flows from a particular project rather than against the
firm as a whole

Ratings Credit categories that denote the various degrees of quality for a bond. The major rating agencies establish
their own criteria for each credit rating. The rating agencies are Standard & Poors, Moodys, Fifth ICBA, Duff &
Phelps. There are other specialized rating groups as well.

Risk: Risk is one of the most misunderstood notions on Wall Street. This is paradoxical because a primary purpose
of the financial services industry is the control of financial risks. Popular misconceptions include: Risk is exposure to
uncertainty. Accordingly, risk has two components:

Risk Premium: Expected additional return for making a risky investment rather than a safe one.

Securitization: Securitization is a process whereby assets are pooled and security interests in the pool are sold—
typically to institutional investors. Assets created in this manner include mortgage-backed securities which are backed
by residential mortgages, and asset-backed securities which are backed by credit card receivables or consumer
installment loans. In a typical arrangement, the assets are transferred to a trust [see footnote] and security interests are
sold to investors. While various directly to investors. In this way, the investors incur the prepayment risk of the
underlying assets. Most deals entail some sort of credit enhancement. This may include over-collateralization, a third
party guarantee, or other enhancements. For this reason, the securities tend to have excellent credit ratings. The
originator of the underlying assets may continue to process the assets—communicating with borrowers and collecting
their payments. They subtract a fee for doing so.

Socially Motivated Capital (SMC) SMC seeks to develop philanthropy and volunteerism to achieve positive social
change in distressed or low wealth communities. Using either the capital markets, market rate debt instruments or the
venture capital approach as a model, socially motivated capital commits time, money and expertise to create
partnerships with not-for-profit organizations.

Subordinated Debt ( junior debt) Debt over which senior debt takes priority. In the event of bankruptcy,
subordinated debt holders receive payment only after senior debt is paid off in full.

Tranche: (1) In the bond market it has two meanings 1) .One of a series of two or more issues with the same coupon
rate and maturity date, but with different dated dates. The tranches become fungible at a future date, usually the first
coupon date. 2) . A bond that shares documentation with another issue, but has different terms.

Underwriter A technician trained in evaluating risks and determining rates and coverage for them. The term derives
from the practice at Lloyd's of each person willing to accept a portion of the risk writing his name under the
description of the risk.

Underwriting Where an insurance company takes into account known facts like a portfolios defaults, delinquencies,
cost of capital, in order to assess the likelihood of investors making a claim on the policy. Insurance premiums are
calculated after taking these factors into consideration.

Yield The amount of income an investment delivers after deduction of charges (but not tax) expressed as a
percentage of the amount invested. Usually expressed as an annual figure - e.g. "the fund's estimated gross yield is
5.9% p.a."

Return Yield: Three different measures of a bond's potential rate of return are used:
"Current yield: This is the most simple - and crude - measure. It is simply the bond's annual coupon divided by the
bond's current market price. If a bond is trading above or below par, current yield can give a misleading sense of a
bond's potential rate of return. "Yield to maturity: This is the rate of return which the
bond will realize, based upon its current market price, if it is not called, and makes all its principal and interest
payments as scheduled. " Yield to call: This is the rate of return which the bond will
realize, based upon its current market price, if it is called on the next call date, but otherwise makes all its principal
and interest payments as scheduled. Typically, the term yield will be used by itself to signify yield to maturity. For
non-callable instruments, this is an unambiguous measure of potential rate of return.

DRAFT – WORK IN PROGRESS—Revised February 26, 2001.
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to the Capital Markets



Improving CDC’s access to the capital markets

A financial technical assistance program provided by wall street finance volunteer professionals to
help CDCs, CDFIs and NPOs access the institutional capital markets to fund their businesses, a
portfolio of assets or their operations. It’s Time for Wall Street to Offer Technical Assistance to CDCs
Very often senior management from Community Based Organizations are challenged to find new or
alternative sources of capital to fund their operations but are not interested in paying for expensive
financial consultants or wall street advice that is not relevant to them. Or they are not able to take the
time to really know the nonprofit's business and finance needs. Many CDC chief executive officers,
CFOs and executive directors have told us that they would be interested in learning what their real
market funding options may be or how they might be able to tap the capital markets to finance their
business, operations or their assets. By helping to bridge the capital gap between nonprofits and for-
profits, this financial technical assistance will help vital nonprofit organizations learn which debt
instruments and structured financing techniques that have been successful to finance similar type for-
profit companies may be applied and useful to finance their nonprofit organization.

 The Wall Street Without Walls is a vehicle which provides free financial technical assistance that
allows CDC management to vet their finance ideas, needs or just a resource to discuss possible
financing alternatives by finance professionals from the major Wall Street firms. These volunteers
would include only those seasoned professionals who specialize in financing hard-to-finance
companies. Volunteers from the Wall Street without Walls Program will offer direct financial
technical assistance to CDC organizations. NCCED will play a role in helping their members access
this capacity.

 This professional volunteering approach is not new. It has successfully worked in providing legal,
accounting, engineering, teaching and other technical assistance to nonprofit organizations
throughout the country from local programs to those provided by trade associations. Now is the time
to expand this need for financial technical assistance provided by the major financial firms.

There is a need for Wall Street professionals to be responsive to their nonprofit colleagues. Finance
professionals in structured, public finance or investment banking need to transfer their expertise
and guidance to the CDCs seeking to advance their mission by expansion, funded in part by the
capital markets. Wall Street without Walls is similar in form and service to the successful
professional volunteer assistance programs provided by such organizations as:

 Doctors of the World,

 Pro-Bono Legal Aid Society,
 Legal Center for Connecticut Nonprofit Organizations,
 Virtual Volunteer Engineers,
 Volunteers of America,

All of these programs are sustained volunteer efforts to transfer skills, experience and assistance to
nonprofit organizations, providing expertise on a pro-bono basis, and allowing CDCs to use their
financial resources effectively on their programs rather than expensive outside vendors.

DRAFT – WORK IN PROGRESS—Revised February 26, 2001.
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to the Capital Markets

The Purpose of the Wall Street without Walls Program Wall Street Without Walls is a foundation
supported financial technical assistance service for CDCs, CDFIs, nonprofit and economic
development organizations will be provided by a team of Wall Street’s accomplished Investment
Bankers re-presenting many firms in structured and public finance, corporate finance, tax and bond
counsel as well as finance specialists of the emerging markets.

The only purpose of this program is to help nonprofits find broader capital market solutions to their
financing needs by helping NPOs think through their financial needs and strategies and vet their
ideas, preliminary financing schemes or concepts for attracting institutional capital.

Wall Street without Walls Provides a Virtual Finance Ideas Team. Over the next few months, the
coordinators of Wall Street without Walls will be inviting senior seasoned finance professionals
from across the Wall Street environment to form a 100 member rolling roster of volunteers every 6
months and this initiative will be housed within a major securities, ABS or municipal bond trade
association or foundation. Two to three volunteers will form the virtual Wall Street without Walls
Finance Idea Team to address the questions of any particular CDC. A traffic manager will receive
and route the incoming demand for technical assistance and match it up with the volunteer team.
Most of the virtual teams assistance will be through the Internet, e-groups, e-conferences calls, e-
mail and telephonic conference calls. It will not be necessary for either the members from the CDC
nor the team be asked to travel or leave their office, yet they may meet at their choice in getting to
know one another.

Capacity - New York / Los Angeles / Chicago / Washington D.C. The first Wall Street without
Walls will be established in New York in January 2001. The technical assistance will be available
to any US nonprofit organization that serves or operates in distressed communities and has
bankable, financeable assets and is able to provide financials and pre-requisite information for the
team to provide relevant suggestions. Other locations may follow in 2001 in Los Angeles, Chicago,
Washington D.C., and Atlanta.

To learn more about the Wall Street Without Walls project, please call Greg Stanton at the Capital
Markets Access Program, (CMA) in New York at 212-977-2759 or email your request to: Email:

DRAFT – WORK IN PROGRESS—Revised February 26, 2001.
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Capital Markets Access Program (CMA)
a capacity building financial technical assistance

About CMA The Capital Markets Access Program (CMA) is a foundation-supported financial
technical assistance initiative. CMA is a multiyear initiative supported by generous funding from four
major foundations: the F.B. Heron Foundation; the Rockefeller Foundation; the W.K. Kellogg
Foundation; and an anonymous foundation. The CMA program was developed in response to the
substantive need for financial technical assistance. The program is aimed at NPOs that may have both
financing needs and sufficient or “bankable” assets to access the capital markets in some form. Gregory
Stanton serves as the program’s director. The core CMA activity of this program is to help senior
management of nonprofits bridge into the public and private capital markets as a source of funding for
their capitalization, growth plans, and gradual independence from subsidy and philanthropic funding.

CMA Overview The CMA program assists nonprofit management teams in assessing and analyzing its
financial management needs, strategic business and finance plan, and its access to capital. The results of
these efforts have been to build the capital markets tools, provide alternative capital sources to
philanthropy, and build the capacity for NPOs. CMA connects the NPO with a number of the capital
markets resources to meet the capital needs of the community development financial management.

The CMA program is housed within New School University’s Nonprofit Management Graduate
program and the Robert J. Milano Graduate School of Management and Urban Policy and provides
opportunities for students and faculty to benefit from the program’s research. The purpose of CMA is to
address a significant gap in capacity and TA for grantees active with economic development missions.
CMA also assists the senior management of these organizations in thinking through, developing,
drafting, and implementing the finance strategy for their organization.

CMA Director CMA Director is Gregory Stanton. Previously, Greg Stanton was founder, president,
and CEO of Dover Finance Corp., an independent structured financial services firm, think tank, and
research company working with the specialized finance group at Merrill Lynch during the 1990’s
financing hard-to-finance, highly leveraged companies. During the 1980s, Mr. Stanton was Capital
Markets New Business Advisor at Daiwa Securities America, an international investment bank.
Previously, Mr. Stanton was a capital markets bond salesman and new financial products manager at
Drexel Burnham Lambert in New York.
To Date The Capital Markets Access Program of New York has helped approximately 150 economic
development and nonprofit organizations. This assistance applies proven structured finance tools from
the for-profit arena to specific financing needs in the not-for-profit sector, including financing low-
income housing, CDFI loans, and or stand-alone NPOs. The Technical Assistance is designed to
empower senior management. The following refer to some of the applications of debt technology to the
Nonprofit Sector. CMA assisted a number of transactions be placed in the market which would not have
occurred without this financial technical assistance (FTA), such as nonprofit bond finance, public
finance for NPO owned manufacturing facilities, private placements of CDFI small business loans, and
sale of NPO’s tax credits. Several transactions have been completed, ( approximately $ 90 million
dollars) in CDCs and CDFIs in the following types of assets: 1) Mortgage financing (single family,
multi-family, or rental properties) for low-moderate income housing offering CRA credits and various
tax credits, 2) Small business loans - financing portfolio of loans from CDFIs. 3) Financing micro credit
loans to minority entrepreneurs and funding community development credit unions 4) Project finance:
Funding tax-driven NPO projects of a wide variety of assets, including commercial real estate in
brownfield areas and 5) Receivables Funding: Factoring the advances, future flows, or packaging pools
of short-term receivables generated from the NPOs’ businesses.

DRAFT – WORK IN PROGRESS—Revised February 26, 2001.
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About the Authors

Gregory M. Stanton is the director of the Capital Markets Access Program (CMA) 18 for Nonprofit
Organizations (CMA), a New York based financial technical assistance program funded by four major
foundations. Prior to CMA Greg worked for 18 years in senior positions with Wall Street firms in the
capital markets primarily selling and structuring investment grade bonds, asset backed securities and
private placements for Drexel Burnham Lambert and Daiwa Securities America. From 1992 - 1998
Greg was founder and CEO of Dover Finance Group, a structured finance firm working with Merrill
Lynch & Co. financing the assets of highly leveraged, hard-to-finance companies. Greg has been
recognized for his work in structuring new debt instruments and developing new finance models for
emerging market and hard-to-finance assets. Greg earned a BA from Boston College (’78) and an MBA
from Babson College (’84). Email:

Jed Emerson is the Bloomberg Senior research Fellow on Philanthropy at the Harvard Business
School and a Senior Fellow with the William and Flora Hewlett Foundation (Menlo Park, CA). From
1990 until 2000, Jed was President of the Roberts Enterprise Development Fund, a leading venture
capital fund in philanthropy and Executive Director of the Roberts Foundation Homeless Economic
Development Fund. Jed is recognized as one of the pioneers in researching and developing effective
models for measuring Social Return on Investment (SROI). From 1985-1989 Jed served as the
Executive Director of the Larkin Street Youth Center in San Francisco, CA. Jed has written extensively
on issues related to nonprofits and capital development. Many of his papers may be found on the
publications page of Email: Live4Punk@REDF.ORG.

Marcus Weiss Marcus Weiss is President of the Economic Development Assistance Consortium (EDAC),
a national consulting firm specializing in commercial revitalization, innovative linkages, economic
development and legislative issues of concern to government, community-based organizations and
foundations. He serves as a consultant to the U.S. Department of Housing & Urban Development, the U.S.
Department of Health and Human Services, the U.S. Department of Labor and the U.S. Department of
Commerce. In addition, Mr. Weiss regularly serves as a consultant to the National Congress for
Community Economic Development and is a member of the Enterprise Foundation’s Best Practices
Database Advisory Board. In addition, Mr. Weiss serves as a member of Seedco’s Community
Development Technology Initiative Advisory Committee. Marcus holds a JD from Boston University
School of Law and BA from American University School of Government. Email:

An example of a foundation funded FTA Program: the Capital Markets Access Program (CMA)
The CMA Program applies structured finance technology to NPO finance. Since May of 1999, four foundations have funded, a financial
technical assistance program called Capital Markets Access Program (CMA) in New York. This program offers specific tools and financial
technical assistance to nonprofits that have 'packageable' and financeable assets that might access the capital markets (see Appendix A for
additional information). The primary role for the CMA financial technical assistance program is to empower nonprofit senior management by
increasing the number of financing options available to them so that their organizations do not become grant dependent.
Marcus Weiss is the author of Building Partnerships Between State TANF Initiatives and CDCs – A Guidebook for Practitioners and State
Officials, a NCCED publication for HHS, March 2000. He is the co-author of Workforce Development Networks: Community-Based
Organizations and Regional Alliances, Sage Publications, Inc. 1998. He is also the co-author of Community Reinvestment Act: How to
Implement Your Bank's Program, (Sheshunoff Information Services, Inc.), A Banker's Quick Reference Guide to Small Business Incubators
(The Massachusetts Bankers Association Minority Business and Economic Development Task Force), and the editor of Community
Reinvestment Act: Access to Development Capital/Operating in a Changing Regulatory Environment (Mass. Continuing Legal Education,
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Please DO NOT Copy without the express written approval of Capital Markets Access Program