CDFI Loan Fund Capitalization: The Continued Importance of Bank-CDFI Partnerships
CDFI Loan Funds Trends Report, January 2023
While the CDFI field is gaining investors from a wide variety of capital sources, banks remain the largest capital providers to CDFIs. Banks and CDFIs continue their long history of working together to help serve communities, enabling banks to meet obligations under the Community Reinvestment Act in the process. Among mid-sized CDFIs (the “Core Group”), which represent the largest group in the analysis that follows, median debt from banks made up nearly half of total debt. The median cost of debt for this group was 2.1% and median weighted average maturity was five years. Other sources of debt (e.g., corporations) played a meaningful role for certain CDFIs, but showed less field penetration.
This analysis draws upon 2020 and 2021 CDFI capitalization data from Aeris’ annual rating work. Currently, 72 CDFI loan funds are Aeris-rated. (An additional 80 CDFI loan funds report quarterly financial and portfolio performance data to Aeris).
To discern patterns, we classified CDFIs into three groups: Large (more than $500 million in total assets), Core (between $30 million and $500 million in total assets), and Small (less than $30 million in total assets):
|CDFI Groups||Total Assets of Group||Average Total Assets per CDFI||Total Debt of Group||Average of Total Debt per CDFI|
|Large >$500MM (n=8)||$5.5 billion||$691.3 million||$3.1 billion||$388.3 million|
|Core $30MM-$500MM (n=56)||$6.3 billion||$112.2 million||$3.6 billion||$64.0 million|
|Small <$30MM (n=7)||$140.5 million||$20.1 million||$69.3 million||$9.9 million|
Sources of Debt (Median %)
|CDFI Groups||Banks*||NRSRO-Rated Notes**||Federal Government Programs||Private Foundations||Intermediaries||Largest Single Creditor***||Top 3 Creditors ***|
|Large >$500MM (n=8)||29.9%||31.6%||15.1%||10.5%||0.5%||16.9%||32.3%|
|Core $30MM-$500MM (n=56)||48.9%||0.0%||8.0%||6.4%||2.3%||21.3%||42.1%|
|Small <$30MM (n=7)||36.6%||0.0%||22.3%||0.0%||7.7%||37.5%||64.9%|
Note: Other sources of capital (such as State and Local Governments, Faith Based Organizations, Insurance Companies, Pension Funds, Corporations, Individuals and Others) represented median debt percentages of less than 5% for all CDFI groups. While the median percentage was low, these sources were material to certain CDFIs.
* Banks include related foundations, which lend to CDFIs independently or alongside their related corporate entities.
** NRSRO is the acronym for Nationally Recognized Statistical Rating Organization.
*** Creditor concentration medians for single creditors do not include holders of NRSRO-rated bonds and notes.
- Large CDFIs. Six of the eight CDFIs in this group raised capital from the capital markets through NRSRO (nationally recognized statistical rating organization) rated debt offerings. This is a unique characteristic of the Large CDFI group. While such notes are the largest median source of debt (31.6%), other sources of debt remain important and represent material investments, including banks (29.9% median source of debt), the federal government (15.1%) and private foundations (10.5%). For certain CDFIs, other significant sources of debt (>5%) include insurance companies and nonbank corporations (for 2 CDFIs each) and state and local governments and individual investors (for 1 CDFI each).
- Core CDFIs. The debt composition of this group of 56 CDFIs most clearly reflects the continued importance of banks to the CDFI industry. Banks provided a median 48.9% of debt to the Core group. The next largest sources of debt are federal government programs and private foundations, which provided medians of 8.0% and 6.4% of the CDFIs’ debt, respectively. No other debt source exceeded a median of 5.0%. Other debt sources that were important for certain CDFIs in this group (making up more than 5% of debt for that CDFI) but not for the group as a whole were:
- Nonbank corporations (15 CDFIs in this group)
- Individual investors (9)
- State and local governments (8)
- Faith-based institutions (6)
- Small CDFIs. This group of seven CDFIs also relied heavily on banks, which provided a median of 36.6% of debt. Only one CDFI had debt from nonbank corporations making up 5.9% of its debt. In general, the CDFIs in this group had very high source concentrations, but with different patterns. For example, one CDFI in the group was capitalized almost entirely (99.4%) by federal government programs. Another sourced the majority of its debt from private foundations (56.1%), while two CDFIs in the group were primarily capitalized by banks (63.9% and 58.7%). Small CDFIs have the highest Single and Top-Three Creditor concentrations. This CDFI group relies most heavily on federal government programs, with the highest CDFI group median of 22.3%. Federal government programs provide debt based on program eligibility; very few limit the size of the debt to a percentage concentration of the borrower’s total debt. Those that do have such a limit set it generously. For example, the USDA Intermediary Relending Program (IRP) will lend up to 50% of the borrower’s total debt. Small CDFIs also have large private single creditor concentrations (both banks and private foundations) when there is close alignment of mission or geography.
Unrestricted Net Assets (UNA) and Debt Characteristics (Median)
|CDFI Groups||UNA%||Cost of Debt||Secured %|
|Large >$500MM (n=8)||20.5%||2.9%||20.1%|
|Core $30MM-$500MM (n=56)||30.1%||2.1%||27.0%|
|Small <$30MM (n=7)||42.5%||1.9%||32.3%|
- UNA% (Unrestricted Net Assets / Total Assets). There are many factors that enable the Large CDFI group to have a median UNA percentage of 20.5% and leverage more debt, compared with the median UNA percentages of 30.1% and 42.5% for the Core and Small groups, respectively.
- All CDFIs in the Large group are primarily real estate lenders. This means that the collateral for their portfolios is stronger than that of CDFIs in the Core and Small groups, with mixed real estate and small business loan portfolios.
- The large CDFIs are strong in many other areas (such as stability and consistent earnings, well diversified liquidity, sophisticated management systems, etc.), although to different degrees for each CDFI. These CDFIs have characteristics that, taken altogether, result in the strongest distribution of Aeris Financial Strength and Performance Ratings, as shown below.
Aeris Financial Strength and Performance Ratings Distribution
- Cost of Debt. The Large CDFI group has the highest median cost of debt, 2.9%, even though they also have the strongest distribution of Financial Strength and Performance Ratings. This is due to the large amount of NRSRO-rated bonds and notes, which are priced at market. While this drives up the median cost of debt, the significant size of the issuances, and other characteristics of such notes have made NRSRO-rated debt attractive to large CDFIs over the last several years. This may or may not remain the case in a higher-interest-rate environment.
- Secured Debt. Small CDFIs have the highest level of secured debt. This protection for creditors is almost always a characteristic of federal government program debt which, as noted, is a significant source for the Small CDFI group.
Core CDFI Group: Percentage Distribution of Weighted Average Maturity of Debt
The above chart shows the distribution of weighted average maturity (WAM) of debt for the Core group. As noted, debt composition of the Core group is dominated by banks, and thus the WAM of this group most strongly reflects the remaining terms of bank loans to CDFIs. However, WAM is also influenced by federal government and private foundation debt, which are the next two largest sources of debt for the Core group. Debt accessed via federal programs can carry very long terms, which would lengthen WAM. Similarly, foundations typically provide patient capital to better achieve impact goals, which may also extend WAM.
Aeris data shows that the most common WAM are 3–5 years and 5–8 years. While original debt terms would be longer, these WAMs are a good gross proxy. These terms align well with the lending needs of most CDFIs, whose loan products typically carry terms ranging from 3 to 10 years. Shorter term loans are usually for business working capital lending and early-stage real estate development lending. CDFIs’ longest-term loans support real estate mortgages. Loan maturities rarely exceed 10 years (except when matched with targeted net assets or program debt with longer terms). Even with 10-year loan terms, most mortgages have longer amortization periods to align with property cash flows. At maturity, mortgages may then be refinanced by traditional market lenders, after the properties have established cash flow and built equity, or may be fully underwritten and repriced by the CDFI if it chooses to self-refinance these loans.
Other debt characteristics observed by Aeris are as follows:
- Most CDFIs’ private debt, including those sourced from banks and foundations, is structured as balloon loans with periodic interest payments. Occasionally, debt repayment will be spread over one to two years at the end of the term. This structure best fits the CDFI business model, which is to revolve capital in order to continuously serve the financial needs of its clients.
- CDFIs have very high renewal rates (typically more than 80%) from private creditors.
- Debt from government programs—federal, state and local programs—is usually repaid at set maturities, but CDFIs can regularly apply for new government debt awards based on program guidelines.
- Some debt sourced from government programs amortize over the term. Examples include:
- CDFI Fund Bond Guarantee Program (BGP) terms can extend up to 30 years. BGP debt terms are closely tied to the underlying secured loans, which are most often mortgages for real estate projects in low-income communities.
- The USDA’s IRP also carries terms of up to 30 years and may have an interest-only period before beginning to fully amortize over the remaining term of the loan. IRP debt can be used to support a wide variety of small business and/or economic and community development purposes.
New government programs such as the $20 billion Greenhouse Gas Reduction Fund established in the Inflation Reduction Act of 2022, as well as emerging collaborative capital markets initiatives targeting CDFIs, may be influential sources of debt for CDFI loan funds in the future. However, the foundational capital sources that have built the industry will likely remain critical.
This is the tenth in a series of CDFI trend reports tracking CDFI performance. Access the archive of Aeris CDFI loan fund trends reports.
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