Community bonds are generating more and more interest in Montréal. By allowing NPOs to carry out structuring projects while strengthening their ties with their community, these bonds are becoming a force within the social economy. However, they must be used with caution. As is the case with any type of bond, they represent a debt for the issuing organization. The issuer must be well aware of this, and must develop a serious repayment plan before taking advantage of this tool. Two experts offer their views.
What are community bonds?
Community bonds are unsecured debt instruments, or in other words, money lent by the community to the organization that issues the bonds. They feature a par value, along with a predetermined term and compensation for the lender (i.e.: interest rate, which is usually relatively low). In addition, they can only be issued by NPOs, and do not require any intermediary or prospectus.
According to Lydia Tetyczka, Director, Consulting Services & Financing – Social Economy at PME MTL Centre-Est: “This is the ideal tool for organizations that are seeking to consolidate their growth. Whether acquiring land or a building, or even updating their equipment, this type of financing enables the organization to grow and to enhance the community where it has established its roots.”
The importance of supportive investors and an attractive project
Of course, the organization’s roots must be solid. For Anyle Côté, Director of Conseil d’économie sociale de l’île de Montréal (CESIM), that is the first point to take into consideration: “While the investor profile can be diverse (individuals, NPOs or cooperatives, private businesses, foundations or institutions), the main target is those who are supportive of the organization (partners, users, members or clients) and citizens who wish to invest in their community.”
Do these individuals constitute an adequately large and diversified pool of potential investors? That is the first question an NPO looking to issue community bonds must ask itself.
On the other hand, the project for which financing is being sought must also be attractive, because community lenders are looking for more than simply a return on their investment. Anyle Côté points out: “The success of community bonds issued by organizations like Cinéma du Parc, Le Grand Costumier and Bâtiment 7 shows that their investors and their support community are interested in contributing to a business that they believe in, that is in keeping with their core values and that can make a real difference at the local level.”
These businesses have also been able to demonstrate their local roots within their support community. As a result, the success of their community bonds campaigns created a leverage effect among traditional funding organizations.
Winning conditions
If the community support is solid and galvanized, and the project for which financing is being sought is sufficiently attractive, there are other points to be evaluated: The solidity and reputation of the organization must be well established, along with its perspectives for development. It is also crucial to ensure the commitment of major partners. “As with any other bond issuer, the NPO must have a solid business plan and a proven capacity to borrow and pay back its lenders when the term comes due”, Lydia Tetyczka continues.
The social economy expert also raises other questions that, while sometimes underestimated, must be taken into consideration: “Can the organization rely on other sources of financing? Is the board of directors supportive and committed to this course of action? Is the organization ready to take on the associated administrative load, which can be considerable?”
The administrative team must be capable of accurately communicating the related issues and risks to the investors, selling bonds and then managing them. In terms of communications and relations with investors, Anyle Côté is adamant: “They must occur on a regular basis and be transparent. The issuing organization is responsible for determining the best methods for remaining in contact with its support community, even after the bonds have been issued. Communication may take many forms, including e-mails, transmission of annual reports, invitation to a launch or a cocktail, etc.”
The community bond cycle
The issuing of community bonds is not a time for improvisation, especially since the process is lengthy and comprises a number of steps:
- Commitment by the organization’s management team to the conditions related to the financial tool
- Development of the investor kit
- Issuing, sale and management of the bonds
- Repayment to lenders, with interest
- Analysis of results once the term has elapsed (report)
- Launch of a new series of bonds, if applicable
Services to assist NPOs considering this financial tool
“The key to success often precedes the issuing of bonds: The commitment of the NPO’s management team to acquiring the necessary knowledge and applying best practices in connection with the bonds”, Lydia Tetyczka concludes. Working in collaboration with PME MTL, CESIM holds regular information workshops that address this subject. In addition, PME MTL meets with NPO executives to guide them through the process of issuing and managing community bonds, and puts them into contact with relevant experts.
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This article was written in collaboration with Lydia Tetyczka, Director, Consulting Services & Financing – Social Economy at PME MTL Centre-Est and Anyle Côté, Director of CESIM.