Alán Bonilla is a credit analyst at Standard & Poors, more commonly known as S&P. It’s one of the three main credit rating agencies, along with Moody’s and Fitch. Bonilla has worked at all three rating agencies in his career.
Credit rating agencies are key gatekeepers to the trillions of dollars in stock markets and bond markets around the world. In the U.S. alone, there are $30 trillion invested in the New York Stock Exchange, and around $43 trillion invested in the bond markets. The ratings that analysts like Bonilla put out help Wall Street and other investors make decisions about investing in company stocks or bonds from corporations, bodies of government or other bond issuers. Agencies typically update each rating at least once a year, and those updates have profound consequences. For example, when S&P recently cut Macy’s rating, the retailer’s stock price tumbled.
Since coming to S&P in 2015, Bonilla has been part of a team that has had to answer the question: How risky is an organization that specializes in making loans to affordable housing and other community development projects in low and moderate income neighborhoods? Many of those neighborhoods themselves were once declared risky simply because black people or immigrants lived there, and therefore lenders discriminated against making loans in those neighborhoods — the practice known today as redlining.
Bonilla and his colleagues have rated 11 such organizations so far — all of them federally certified community development financial institutions, or CDFIs. All but one are nonprofits. They’ve gotten pretty high ratings, meaning they’re relatively low-risk investments, and investors are buying it. Of those 11, nine CDFIs have ventured out to the bond market so far, and they recently hit a billion dollars in bonds sold as a group.
That means a billion dollars so far from Wall Street, from pension funds, 401(k) accounts, insurance companies and other bond market investors going into nine CDFIs, which then pool those dollars with other sources to finance projects. CDFIs in the bond market today have previously financed projects like the new headquarters for Make the Road New York, or preventing families from losing homes to foreclosure, or rehabbing and converting city-owned buildings into limited-equity cooperative housing for low-income homeowners in Manhattan.
“When we started rating CDFIs, we knew eventually they would attempt to access the capital markets, but I didn’t think personally it would happen as fast as it did,” Bonilla says. “When you hear about the communities they’re lending in, you hear about the historical bias against lending in those communities because of perceived risk. The track records show the opposite, that CDFIs have a pretty stellar record throughout the decades.”
At S&P, Bonilla is part of a team that focuses on around 800 ratings, mostly state housing finance agencies and local public housing authorities. CDFIs are a small slice of that, he says, “But it takes significantly longer to analyze a CDFI versus anything else that we rate.”
When Bonilla goes to rate a CDFI, he looks at financial as well as qualitative factors. There’s a CDFI’s overall track record of loans — how many have defaulted, how many might be behind on payments. CDFIs have kept those numbers very low, Bonilla says. BlueHub Capital, which just got its rating in January, has loan losses of just one third of one percent of all $1.3 billion in loans it has ever made.
Bonilla also looks at income sources, starting with the “spread,” the difference in interest rates they pay to their investors and what they charge to borrowers. Many CDFIs, even those that are very large, still get a lot of income from grants, which are harder to predict and therefore riskier than other sources. But one thing S&P has learned over the past few years is that the more effective a CDFI is at demonstrating their mission impact, the more likely it is that a CDFI will continue to receive grants.
Bonilla also goes through each CDFI’s portfolio, loan by loan, to assess the risk of each loan currently on their books. A lot depends on the progress of the underlying project. A mortgage on a fully leased apartment or commercial building is the safest kind of loan, because the project is generating income. If the project is still under construction, that loan may count for nothing when Bonilla eventually adds up the risk-adjusted value of all the loans. The difference between the CDFI’s risk-adjusted loan portfolio value and what it owes its investors is its “net assets,” and it’s one of the most important components of the S&P rating.
The other most important component Bonilla mentions is qualitative — a CDFI’s strategy and management capacity. “We spend a lot of time in our meetings and due diligence on this,” Bonilla says.
Bonilla looks at board members and internal procedures to ensure oversight and early warning systems in case things are going awry. He also looks at a CDFI’s relationship with its borrowers. Strong and long-lasting relationships give analysts confidence that in a massive economic downturn, those borrowers won’t just vanish, and that those borrowers will come back to the same CDFI once the economy rebounds.
“Who they lend to, these are developers and borrowers that they’ve had relationships with for a very long time,” Bonilla says. “The touch points with these borrowers is significantly more than what you typically see for for-profit lenders, so we give them a lot of credit for that on their management assessment.”
Community Preservation Corporation is one of the oldest CDFIs, founded in 1974 — before there even was such a thing as federal certification for CDFIs. In a 1989 article on tenants taking ownership of buildings in NYC, the New York Times referred to the nonprofit lender as “a consortium of banks and pension funds.” Since inception, Community Preservation Corporation has made $11 billion in loans or investments, including $6 billion in NYC and most of the rest across NY state.
In just one example from 2018, Community Preservation Corporation provided a $14.6 million construction loan and arranged for a $4.6 million investment from the NY state employee pension system to finance the conversion of four city-owned buildings into 94 units of limited-equity cooperative housing in the Washington Heights neighborhood of Upper Manhattan. When construction is complete, the tenants will get the chance to purchase their units for a nominal fee.
Last November, Community Preservation Corporation got a “AA-” rating from S&P, which helped it go on to raise $150 million in bonds on the open market — the largest single bond offering yet from a CDFI.
“This is our life’s work, this is what we do,” says Rafael Cestero, who has led Community Preservation Corporation since 2012. “We’re not some group of private equity people who don’t really know anything about these neighborhoods and communities.”
The first CDFI to call on S&P was Clearinghouse CDFI, based in Orange County, California. Clearinghouse first got its rating in April 2015. Next was Housing Trust of Silicon Valley, which got its rating later that same month. Ironically, neither of those two have used their ratings to enter the bond market just yet. The first CDFI to enter the bond market was the Local Initiatives Support Corporation, or LISC, which got rated in September 2016 and issued the first $100 million of CDFI bonds in April 2017.
BlueHub Capital went to market right after getting its rating in January, selling $75 million in bonds. BlueHub previously provided part of the financing for Make the Road New York’s new headquarters and it is part of a coalition in Boston that purchases properties facing foreclosure and sells them back to the families living on those properties.
“It’s a really a very interesting moment in which CDFIs and the capital markets have gotten together,” says Elyse Cherry, CEO of BlueHub Capital. “I was around for the start of this industry 35 years ago. I don’t think there was a one of us back then who thought we would ever be at this place.”
Access to the bond market doesn’t reduce the need for public subsidies in community development. But what CDFI access to the bond market means is more dollars flowing into projects in new ways.
“There aren’t too many projects we do that aren’t matching CDFI capital with some other public support, whether it’s city, state or local,” says Michelle Volpe, who leads BlueHub Capital’s loan fund team.
Bonilla notes that Community Preservation Corporation’s high rating was partly due to New York City and NY state both having extensive public subsidy programs that reduce the risk of the nonprofit’s construction lending. The subsidies may not come in till after construction is done, but they pay off the CDFI’s construction loans. If those subsidies are in place, it means Bonilla can count those construction loans in his analysis instead of writing them off.
The bond market dollars also don’t eliminate the need to pool capital from others, including banks. The bond markets are just one new — but very large — source of funding that wasn’t previously open to CDFIs. Each CDFI that gets access to the bond markets has its own way of infusing those dollars into its business model. The relatively low, fixed interest rate Community Preservation Corporation got from its bond market investors — just 2.87 percent — means it can pass some of those savings on in the form of lower interest rates or new products for smaller borrowers, according to Cestero.
“We’ve been talking to upstate communities, Buffalo, Rochester, Syracuse, Albany, about vacant 1-4 family homes in their neighborhoods,” says Cestero, who grew up in Rochester. “That’s an area we think we could really have an opportunity to do something we probably wouldn’t have been able to do before.”
While there are now over 1,000 CDFIs across the country, Bonilla doesn’t expect a huge slice of them will ever get an S&P rating as a CDFI. It’s still a significant up-front cost to prepare internal accounting and management systems to get rated and to issue bonds, not to mention the cost of the ratings themselves — the rated organization pays the agency to get rated and keep its rating updated every year. So far only the largest CDFIs can afford to get rated and issue bonds.
“I don’t think we’re ever going to get to be at a place where we have a hundred CDFI ratings, but maybe twenty,” Bonilla says.
This article is part of The Bottom Line, a series exploring scalable solutions for problems related to affordability, inclusive economic growth and access to capital. Click here to subscribe to our Bottom Line newsletter.
Oscar is Next City's senior economic justice correspondent. He previously served as Next City’s editor from 2018-2019, and was a Next City Equitable Cities Fellow from 2015-2016. Since 2011, Oscar has covered community development finance, community banking, impact investing, economic development, housing and more for media outlets such as Shelterforce, B Magazine, Impact Alpha and Fast Company.