Coronavirus draws MacArthur Foundation into bond market to fund grants
The John D. and Catherine T. MacArthur Foundation will tap the bond market to raise $125 million for grants targeting not-for-profits and communities battered by the COVID-19 pandemic and social injustice, with a particular focus on challenges faced by African Americans.
The foundation's first bond market foray garnered the top Aaa rating from Moody’s Investors Service for its first foray into the bond market. The 10-year, taxable social bond issue that will carry a corporate CUSIP prices as soon as Thursday. Morgan Stanley is the senior manager with Loop Capital Markets and Ramirez and Co. rounding out the team.
The 42-year-old Chicago-based foundation’s commitment is part of a larger, new funding pledge of up to $1.7 billion over three years announced in June by a group of foundations in response to COVID-19 pandemic.
The others are the Doris Duke Charitable Foundation; Ford Foundation; W.K. Kellogg Foundation; and the Andrew W. Mellon Foundation. Ford committed $1 billion; Kellogg $300 million; MacArthur $125 million; Mellon $200 million; and Doris Duke $100 million. Ford sold $1 billion of taxable social bonds in June.
Each will award grants based on its own mission, priorities and guidelines on racial equity and social justice, arts and culture, higher education, human services, climate solutions, and other areas.
The aim is to “provide financial support to communities that are most vulnerable and hardest hit by the impact of COVID-19” and to “help stabilize and sustain a nonprofit sector facing devastating economic effects due to the global pandemic and the epidemic of social injustice,” the foundations said in a June statement.
The MacArthur Foundation headed into the New Year with plans in place to support its existing goals and strategies but COVID-19 drove further thought in how the foundation should respond.
“The foundation recognized that this was a moment in time in which further work and action was necessary to address these twin crises” and the foundation saw “an opportunity that was presented to address systemic reforms in a variety of areas and to address deep racial and social economic disparities,” Joshua Mintz, the foundation’s vice president, general counsel and secretary said in a recorded investor presentation.
The $1.7 billion is in addition to the various foundations’ existing budgets.
An opinion supporting the social bond designation based on the International Capital Market Association “Social Bond Principles” is provided by Sustainalytics.
Moody’s said its Aaa rating and stable outlook “incorporates the John D. and Catherine T. MacArthur Foundation's $7 billion of financial reserves, almost entirely free from donor restrictions, which provide a superior buffer to operations and pro forma debt.”
The bonds are an unsecured general obligation of the foundation.
The foundation reports its use of proceeds as being to “provide grant funding to address the consequences of the COVID-19 pandemic across a range of issues, particularly as it has affected communities of color and the not-for-profit sector, generally, and addressing the systemic issues exposed by the pandemic and the protests in response to police use of violence against persons of color especially African Americans.”
Monthly liquidity is strong covering six years of operating expenses and provides flexibility to meet grant-making commitments and unfunded commitments within the investment portfolio. Strong management and board oversight of investments is another strong point as well as the foundation’s “excellent brand and strategic positioning and financial strategy,” Moody’s said.
The primary credit risk is its reliance on investment income for operating revenue. “Deterioration in investments could erode endowment spending power and credit quality, particularly as the foundation issues its first long-term debt,” Moody’s said.
“The financial fallout of COVID-19 is being felt as nonprofits are experiencing postponed programming and revenue-generating events, threatened academic enrollments, canceled artistic seasons, fewer grants from foundations given lower endowments, reduced corporate sponsorships, and prospects that government contracts are at risk due to shortfalls in state and city budgets,” the foundations' joint statement said.
The group hopes its infusion of capital will help improve the resiliency of the nonprofit recipients and also move them to viable operating models in a post-coronavirus environment.
Issuing bonds now is a better option than reducing its endowment, the MacArthur Foundation said.
“Given the likely continued market uncertainty, investment professionals argue against liquidating assets during times like these if we are committed to our fiduciary responsibility of long-term stability and capital preservation for future grant-making,” it said on a frequently-asked question page.
While foundations have issued debt to fund construction projects, borrowing to fund grants is new and the MacArthur Foundation believes the new route offers opportunity.
“Issuing debt at this scale is a new approach for the field. Additionally, this is an unprecedented collaboration that points the way to a more nimble, high impact, and equitable approach to grant-making,” the foundation wrote. “If broadly adopted, billions of new dollars could be injected into the nonprofit sector, providing much needed financial assistance at a time when the sector is suffering from postponed fundraisers, cancelled artistic seasons, reduced corporate sponsorship, and less funds from endowments and individuals reliant on market returns for donations.”
The debt's “social” designation is based on planned use, process for selection of project funding, management of bond proceeds, and reporting process, said the foundation’s Debra Schwartz, managing director for impact investments.
The foundation ended last year with $7.2 billion of assets and has awarded more than $7.3 billion in funding to nearly 10,000 organizations in the U.S. and internationally.
The foundation’s formal mission statement is to support creative people and effective institutions and influential networks “building a more just, verdant, and peaceful world.”
It follows several approaches including making what it calls “few big bets” it believes can make progress on global climate solutions, decreasing nuclear risk, promoting local justice reform in the United States and reducing corruption in Nigeria. It also awards grants, awards, and prizes under its mission. “Our work does span the world,” Mintz said in the presentation.
The foundation made grants and other program investments of $293 million last year. Its net assets without donor restrictions totaled $6.7 billion.
Market turmoil had stung the board’s portfolio through May when the return was down by 10% with the portfolio at $6 billion after a 17% return last year. The foundation investment strategy is to earn a long term 5% return.