ImpAlph: Community-led COVID recovery, Black-led real estate, climate risk-adjusted indexes, natural capital, ESG improvers
Community lenders can lead the COVID recovery for small businesses – with an infusion of common equity. Community lenders got a head start this week in taking applications for a fresh round of small business loans under the Paycheck Protection Program extended in the U.S. spending bills approved last month. That’s a reflection of the heroic efforts of many community development financial institutions, or CDFIs, and minority-owned depository institutions, or MDIs, in reaching the smallest businesses in lower-income, rural, and communities of color in the first round of aid last spring (see, "Innovative CDFIs scale up to help underserved communities move from relief to recovery"). And with the spending bills’ mandate of $12 billion in emergency capital to bolster the balance sheets of CDFIs and MDIs, themselves, the COVID disruption is proving to be a watershed moment for expanding community lending more broadly. The $3 billion allocation to the CDFI Fund in the spending package could result in an increase of four times that amount in additional lending, and it lowers the risk of investing in such institutions. “For impact investors, this unprecedented appropriation provides a unique opportunity to invest in MDIs and CDFIs,” write Laurie Spengler of Courageous Capital and George Surgeon of GSJ Advisors in a guest post on ImpactAlpha.
- Devilish details. Rules for the additional $9 billion under a new Emergency Capital Investment Program could be problematic, the authors say. For starters: The infusion of capital in the form of 10-year limited-life preferred stock, rather than common equity, is likely to be used to refinance existing capital and not necessarily increase lending (see, "Corporate deposits in CDFIs are good. Equity investments would be even better"). Community lenders “do not need a bail-out,” Spengler and Surgeon write. “However, they do need a significant infusion of common equity capital to strengthen their balance sheets in order to dramatically increase lending during the recovery.”
- Calm before the storm. There was no deluge of loan applications when the community lenders’ exclusive two-day window opened this week. This time, larger businesses are excluded, and businesses that got loans in the first round must wait to apply for second draws. “It’s the calm before the storm,” said Southern Bancorp’s Darrin Williams (see, Agent of Impact). Many businesses the bank serves are in the hard-hit hospitality sector, Williams says. In the Mississippi Delta region, for example, dozens of blues festivals were canceled due to COVID.
- Secondary market. Corporate bonds and mortgages are securitized; a new white paper argues that CDFI loans can be resold as well. “We see an opportunity for a quantum leap forward in CDFI funding,” write Christopher Shin of the Local Initiatives Support Corp. and Sean Campbell of Capital for Communities, in “Securitization for Social Innovation.” There’s a model: the LISC-managed New York Forward Loan Fund (see, "New York’s $100 million loan fund for small businesses is a model for a $1 billion national fund").
- Keep reading, “Community lenders can lead the COVID recovery for small businesses – with an infusion of common equity,” by Laurie Spengler and George Surgeon on ImpactAlpha.