The Collaborative for Healthy Communities

Report: Scaling the Use of Guarantees in U.S. Community Investing

The Collaborative for Healthy Communities lends to federally qualified health centers, which provide healthcare to medically underserved communities.

Background

Community health centers provide primary and preventative care to some 25 million people in low-income communities around the United States. Growth in the number of insured people in recent years, primarily due to the Affordable Care Act and its accompanying expansion of Medicaid, has increased the demand for healthcare services. Yet many healthcare centers lack access to the affordable capital necessary to expand their facilities and meet the growing demand in their communities.

In 2012, the Low Income Investment Fund (LIIF) and the Reinvestment Fund (TRF), two CDFIs headquartered respectively in San Francisco and Philadelphia, were interested in entering the federally qualified health center (FQHC) financing sector, as they foresaw imminent growth in demand for FQHC services. Though LIIF and TRF had partnered in the past, both were less familiar with the underwriting considerations associated with the healthcenter market.

The Need for a Guarantee

For several years, the Kresge Foundation has been interested in improving healthcare in low-income neighborhoods and in supporting collaboration between CDFIs. LIIF and TRF had worked with the Kresge Foundation in the past. Through ongoing dialogue, the three organizations identified FQHC financing as a common interest. The Kresge Foundation agreed to help fund research to identify those states with the greatest need for FQHC financing. This research identified states that were new geographies for LIIF and TRF, posing yet another risk. It would be challenging for LIIF and TRF to obtain board approval for loans in an unfamiliar sector and geography.

To mitigate the risks associated with lending to FQHCs in new states, the Kresge Foundation agreed to provide an unfunded 20% guarantee for LIIF and TRF loans to the sector. Kimberly Latimer-Nelligan, the Chief Operating Officer of LIIF, commented that “the guarantee was critical to going into a brand-new sector and geography.” LIIF and TRF launched the Collaborative for Healthy Communities in 2012 to co-lend up to USD 25 million—backed by a guarantee up to USD 5 million—to finance the building expansion of FQHCs in eight states.

By 2014, USD 15 million had been deployed to three deals in Washington, New Jersey, and Pennsylvania, with none of the loans defaulting; the Collaborative had proved successful thus far. The CDFIs felt increasingly comfortable in the sector, having gained a better understanding of the risks involved. To scale the model, the lenders needed significantly more capital, as well as a structure that would provide them with the capacity to lend nationally. LIIF and TRF secured additional investment from Goldman Sachs, and the Rockefeller Foundation invested a relatively small amount in a first-loss position. They also invited the Primary Care Development Corporation (another CDFI) to begin co-lending. The structure of the Collaborative enabled the CDFIs to source, structure, and underwrite deals that fit agreedupon criteria before obtaining the investors’ approval, who then funded deals directly as co-participants. This was a preferable alternative to the typical structures of CDFIs either lending directly from their own balance sheets or creating a special-purpose entity with its own accounting, reporting, and obligations.

These additional investments, along with capital from the CDFIs (including what remained of the initial funds), were rolled into a limited liability company called HealthCo, raising the total lending capacity to USD 55 million. The Kresge Foundation’s original guarantee was extended to cover this larger pool (except for Rockefeller’s first-loss capital), lowering the guarantee’s level of coverage from 20% to roughly 10%. Transferring the USD 5 million guarantee to HealthCo helped preserve the Kresge Foundation’s resources (compared to increasing the guarantee size) while demonstrating that the loans were credit-worthy. The willingness of the CDFIs and lenders to accept the lower coverage level indicates their increasing understanding of and comfort with FQHC financing.

 

Negotiations

Strong existing relationships and layers of risk-sharing facilitated relatively smooth negotiations for this deal. During the first phase from 2012 to 2014, the CDFIs developed a track record of originating loans to FQHCs, which made the deal less risky from the perspective of Goldman Sachs. The small amount of first-loss capital from the Rockefeller Foundation in the structure also helped Goldman Sachs make the decision to invest. As Dan Nissenbaum of Goldman Sachs said, “Our perspective was that the projects were small, bespoke deals, and we would be taking borrower risk, operating risk, and real estate risk, all in areas new to the CDFI originators, but we got comfortable knowing the strength of our partners, their track records, backed by the limited credit enhancement.”

Results

The Kresge Foundation’s guarantee provided LIIF and TRF with the opportunity to assess the specific underwriting and credit-quality challenges of the FQHC sector. Noting the risks involved, Kimberly Latimer-Nelligan of LIIF commented that “the guarantee was critical in us deciding we could do it and obtaining board approval.” She further explained that it ultimately enabled them to get “comfortable enough with lending to the clinic space, so we felt that we could scale back the level of the guarantee (so we went from 20% to 10%) and raise more money to achieve greater leverage for the guarantee”. It also allowed LIIF to offer more favorable pricing and terms to the health centers, consistent with those of other CDFIs.

The Kresge Foundation’s USD 5 million guarantee was leveraged to bring up to USD 132 million into affordable healthcare investments in low-income communities. By the end of the origination period in mid-2016, the partners had deployed almost USD 40 million in debt and an additional USD 64 million in financing backed by NMTC and other sources. Equally important, the guarantee helped LIIF and TRF prove from 2012 to 2014 that the FQHC financing sector was credit-worthy. As a result, they felt more comfortable lending to the sector with a lower level of guarantee coverage, with private-sector players investing more capital into these impactful deals. HealthCo has to date financed over 460,000 square feet of FQHC expansion, with these health centers serving approximately 230,000 patients per year, most of whom are low income. The CDFIs now plan to deploy the remaining capital, outside of the formal HealthCo structure, with the support of the remaining Kresge guarantee.

Conclusion

Since 2012, LIIF has adopted underwriting standards and products for lending to the FQHC market. Kimberly Latimer-Nelligan of LIIF explained, “we have come up to speed, we’ve developed staff knowledge, and we understand the sector better. So we will be better able to underwrite clinics without a guarantee in the future.” One of the eight issued loans has been repaid in full, none have defaulted, and all are expected to be repaid.

Many interviewees in this research identified opportunities to use guarantees to channel private-sector capital into impactful deals in the affordable healthcare sector (see the section, “Promising Sectors for Use of Guarantees,” on page 39). The success of HealthCo presents an example for impact investors interested in improving health outcomes in low-income and medically underserved communities.

 

Key Details

BASIC INFORMATION
Overview

The Kresge Foundation provided an unfunded guarantee to support co-lending among three CDFIs for health centers.

Year

2012: The Collaborative for Healthy Communities initiative was launched, 2014: HealthCo was structured to funnel additional investment into the initiative

Size of Guarantee

USD 5 million

Size of Loan Pool

Up to USD 132 million total, including USD 55 million in debt and up to USD 77 million in capacity through New Market Tax Credits (NMTC) equity and other sources

Impact Themes

Access to quality and affordable healthcare

KEY CONSIDERATIONS
Objectives of the Guarantee

The guarantee was intended to expand financing for healthcare centers in high-need states. It did this by mitigating risk for CDFIs who were unfamiliar with the sector and therefore did not have established underwriting guidelines.

Type of Risk Addressed

The guarantee mitigated the risks of lending in an unfamiliar sector and geographies.

Coverage Level

The initial guarantee provided 20% top loss, pooled. In 2014, the coverage level was reduced to 10%. The guarantee stipulated that Kresge would take the first loss, the CDFI lenders would take the next portion, and further losses up to 75% of each loan would be covered by the guarantee.

Financial Return

The unfunded guarantee allowed the funds to stay invested elsewhere as part of Kresge’s endowment, and was recorded as a contingent liability on their balance sheet. A fee of 10 basis points of the total value of the guarantee was charged annually, which helped with accounting (see the text box on accounting practices for guarantors, on page 26).

Triggers and Access

 In the event of nonpayment, LIIF and TRF were required to work with the borrower for 90 days to attempt to reach a resolution. After this point, the guarantee could be called.

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