Risk balance key with new social bond

Investors in a new social benefit bond will be taking more risk for higher returns.

Summary: The Benevolent Society has launched a $10 million social benefit bond, the second in such issue in as many months. The offer involves two classes of bonds and is open to sophisticated, institutional and philanthropic investors. Potential returns range from 10% to 30%, and are subject to certain performance milestones being achieved over the five-year term.
Key take-out: The proceeds from the social benefit bonds will be used to keep at-risk children in NSW out of care.
Key beneficiaries: General investors. Category: Fixed interest.

Coming hot on the heels of the successful sale of $7 million of Social Ventures Australia’s Newpin social benefit bonds, The Benevolent Society has launched its own social benefit bond.

Strong demand from its network of private and institutional investors allowed SVA to close its social benefit bond (SBB) offer in the first week of June, a month ahead of schedule.

Working in conjunction with Commonwealth Bank of Australia (CBA) and Westpac Institutional Bank (WIB), The Benevolent Society (TBS) began distributing presentations to its institutional investor clients and philanthropic supporters last week. As with the first SBB issue, this latest issue is restricted to sophisticated investors, with the minimum investment set at $50,000.

But that is where the similarities end, at least for the structure of the SBB. Potential investors should not make the mistake of thinking that all SBBs will be the same.

TBS is seeking to raise $10 million for five years, not seven, and two classes of SBBs will be issued. The P class SBBs are aimed at sophisticated and institutional investors and are principal protected. The E class SBBs are aimed at philanthropic investors, with 100% of the principal at risk.

The allocation of P class and E class SBBs is $7.5 million and $2.5 million, respectively.

Investors in the Newpin SBBs can lose up to 50% of their principal but can also earn a return of up to 15% per annum on their investment. The potential compensation for investors in the TBS P class SBBs is up to 10% per annum, and up to 30% per annum for investors in the E class SBBs.

The E class SBBs offer equity-like risks and equity-like returns.

However, the returns earned on both classes of SBBs will only be calculated and paid at the end of year five.

Like the SVA’s SBB, the proceeds from the TBS SBBs will be used to keep children in NSW out of care. TBS cites research that shows it costs $66,000 per annum to keep a child in foster care in NSW.

TBS is aiming to reduce the incidence of children entering into care and, at the same time, reduce the number of Helpline calls received, and safety and risk assessments completed, by the NSW Department of Family and Community Services (FACS).

The TBS program will be aimed at children under five years of age, and 400 families are expected to be helped over five years. TBS will provide families identified by FACS with intensive support for up to six weeks and ongoing support for up to nine months.

The success of this intervention program will be measured against a control group of equally at-risk children, whose families will not receive intensive intervention from TBS. From past experience, TBS has found that intensive intervention can reduce the incidence of child protection reports by 40% and the need for out of home care by 43%.

TBS also cites similar US programs that have achieved reductions in out of home care for children of between 21% and 56%.

If the assessed performance improvement resulting from TBS intensive intervention against the control group is less than 5% over the five-year period, the P class SBB holders will receive no return on their investment. The E class SBB holders will not only get no return, they will lose their principal as well.

However, if the assessed improvement is greater than 40% investors will receive the maximum returns of 10% per annum and 30% per annum, respectively. A sliding scale of returns applies for performance improvements greater than 5% but less than 40%.

The TSB SBB offer officially opens on July 1 and will close July 15. Interested investors should contact Simon Ling at CBA (simon.ling@cba.com.au) or Craig Parker at WIB (cparker@westpac.com.au).

Philip Bayley is a former director of Standard & Poor’s and now works as an independent consultant to debt capital market participants. He also writes on matters concerning debt capital markets and banking for various publications and is associated with Australia Ratings.

Want access to our latest research and new buy ideas?

Start a free 15 day trial and gain access to our research, recommendations and market-beating model portfolios.

Sign up for free

Related Articles