Ford Foundation forges a new path for philanthropic financing
First-of-its-kind bond sale increases grants to social justice organizations and other nonprofits.
Near the start of the COVID-19 pandemic, when related shutdowns canceled everything from business activities to performances and fundraisers, Darren Walker, president of the Ford Foundation, became aware of what he called an “existential challenge” facing the nonprofits his organization supports. Social justice, arts, and human rights organizations immediately realized a devastating impact on their operations, cash flows, and potential survival.
Around the same time, Walker also noted the Federal Reserve lowering interest rates, making capital markets attractive for issuing bonds.
In the mind of the former investment banker and lawyer now in the driver’s seat of a nonprofit started by a family famous for vehicle innovation — the proverbial wheels started turning.
Walker’s idea, supported by the 15-member Ford Foundation board that spans four countries, was to issue bonds by offering a labeled Social Bond in the U.S. taxable corporate bond market — effectively borrowing $1 billion. Governments, educational institutions, and companies frequently borrow into capital markets in this manner, but the move is rare for nonprofits.
As the lead underwriter for this transaction, Wells Fargo was a key part of the deal, which is now seen as the ignition point for distributing badly needed cash to nonprofits during the pandemic. The bonds are unsecured general obligations of the Ford Foundation. The move is akin to taking out a mortgage and paying it back over time with the endowment, rather than directly drawing money down from the endowment.
The bond proceeds will allow the foundation to increase its grants to nonprofit organizations by $1 billion over the next two years, nearly doubling the foundation’s funding to nonprofits. The injection of new funding will support grantees’ core programs and general operating costs, helping to stabilize and strengthen nonprofit organizations that often serve the very communities hardest hit by the pandemic.
“The Ford Foundation, as a highly rated institution noted for its exceptionally strong wealth levels, was an ideal candidate to do this large bond issue,” said Sally Bednar of Wells Fargo Securities’ Public Finance group, the lead banker on the transaction. “It was a first in many respects, but many can follow.”
Normally, foundations issue bonds to raise money for capital campaigns that sustain brick-and-mortar projects. Foundations also normally spend about 5% of their endowment every year, which is the minimum required for tax-exempt private foundations under federal law. With the bond issue, the Ford Foundation will distribute almost 10% this year and next year.
This novel approach was necessary because these are not “normal” times, as Walker noted, and the foundation’s unconventional approach will help make sure grantees don’t stall out during the pandemic.
“For most foundations, the idea of taking on debt is outside of normative thinking,” Walker said to Ford’s board in May. “COVID-19 has created unprecedented global challenges that demand an unprecedented, urgent response, and foundations should consider ideas — even radical ones that would have never been considered in the past.”
The Ford Foundation’s primary focus is to support nonprofit organizations working to address inequality in all of its forms, from criminal justice reform, gender, and racial equality to wage inequality of front-line workers, housing and community-based programs, and more. The pandemic exposed and deepened the inequalities that existed, so funding to help these critical organizations survive was paramount.
Wells Fargo Securities advised the Ford Foundation to label the securities “Social Bonds,” as a major portion of the proceeds will be used to further the Ford Foundation’s mission of reducing poverty and injustice. This label helped attract a broader base of investors, including ESG-focused and international accounts, which in turn helped provide momentum for the offering. As the sustainability structuring agent, Wells Fargo Securities also coordinated the Foundation’s procurement of a Second Party Opinion from Sustainalytics, a company that grades companies on environmental, social, and governance (ESG) criteria (PDF).
Teams within Wells Fargo had to collaborate in new ways to help the deal move forward. Experts on ESG from across the organization merged for the task. The Investment Grade Debt Capital Markets team within Wells Fargo Securities, led by John Hines, was brought in to assist with structuring the deal and marketing the bond to investors.
“We had been an active book runner on the first corporate bond with COVID-related use of proceeds earlier in the year, so we had great perspective on market demand for a transaction like this,” said Hines. “We were very excited about the opportunity to build off that success and work on something similar with the Public Finance team for the Ford Foundation.”
“COVID-19 has created unprecedented global challenges that demand an unprecedented, urgent response, and foundations should consider ideas — even radical ones that would have never been considered in the past.” — Darren Walker, Ford Foundation president
Investors across the spectrum were eager to participate in the bond sale, notably ESG-focused accounts, corporate buyers, foreign investors, and traditional muni buyers.
“Investor appetite for sustainable and social impact investing is buoyant,” said Chris McKnett, Wells Fargo Asset Wells Fargo Management’s co-head of sustainable investing. “The pandemic has buttressed demand, as investors hone in on the potential advantages accruing to entities with strong and authentic human capital performance, in addition to the intrinsic appeal of investing in such firms.”
The bond sale was successfully executed on an expedited timetable by the end of June. The Ford Foundation wanted to work quickly in order to get money into the hands of grantees as soon as possible, Bednar said. Within Wells Fargo, the excitement to work on the unprecedented deal helped accelerate the pace of the work and approvals.
“It was a learning experience for many people, but there was so much enthusiasm,” Bednar said. “What Darren wanted to do is set a template that other philanthropic organizations could follow, and when they did, they could be much more efficient going to markets and their costs could be lower. This was setting a standard that others could realize, and really a brilliant, out-of-the-box move.”
Since the deal, other foundations have issued bonds similarly, and Wells Fargo teams are fielding interest from clients interested in going down the same road.
“This proves that even through COVID-related volatility, investor interest in ESG-related and Sustainability offerings has not waned,” said Odon von Werssowetz, the banker from Hines’ team who advised on the ESG structuring aspect of the deal. “COVID-19 and the social justice movement have put a brighter spotlight on corporate ESG issues, in particular social ones, and we expect this focus on ESG to continue to grow and impact all facets of our business.”
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