Social Benefit BondsSocial Benefit Bonds
Maximising prospectsg p p
for a successful outcome
with thewith the
Institutional...
Westpac and Social Finance/Social Benefit Bonds
We have an aspiration to assist the community as part of our broader
susta...
Structuring the Best Social Benefit Bond
Fundamental considerations for any Bond including an SBB:
1 What is the need?1. W...
The Benevolent SBB - Bond Terms
Issuer
Perpetual Corporate Trust ATF The Benevolent Society
Social Benefit Trust No. 1
P S...
Funding Structure
NSW GovernmentNSW Government
Class PClass P
The Benevolent Society
(Service Provider)
The Benevolent Soc...
Investor Risk and Reward
Risk Level Risk vs Rewards*
Cl P M d t
Capital Protected. Interest payable at Bond maturity. Inte...
Structuring the BenSoc Social Benefit Bond
1. What is the need?
Compelling features:Compelling features:
• NSW Government ...
Structuring the BenSoc Social Benefit Bond
3. What do Investors want?
Issues:Issues:
Typically they look for large, conser...
Structuring the BenSoc Social Benefit Bond
3. Who are the likely Investors?
O hOur approach:
1. Engage with Key Foundation...
Structuring the BenSoc Social Benefit Bond
What are the key terms of the Bond that are likely to attract Investors?
Given ...
Managing the Bond: end to end.
1. Select your partners and key transaction managers carefully.
2. Engage with Government e...
Might anyone guarantee the Bond?
1. The Senior Tranche of the BenSoc SBB is Capital Protected not Guaranteed.
The differen...
Key challenges to address in the future.
1. We need to challenge Conventional thinking in investment behaviour.
2 “ ’ G ” ...
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Craig Parker

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Craig Parker

  1. 1. Social Benefit BondsSocial Benefit Bonds Maximising prospectsg p p for a successful outcome with thewith the Institutional Bank. Craig Parker Executive Director, Head of Structured and Asset Finance, Email: cparker@westpac.com.au th7th August 2013
  2. 2. Westpac and Social Finance/Social Benefit Bonds We have an aspiration to assist the community as part of our broader sustainability goalsustainability goal SBB’s are a great example of where we can contribute and introduce our skills and experience to a new field of social development. We seek to be at the forefront of the development of a Social Finance Capital Market in Australia. The need exists. The foundation work needs to be done by organisations that have the capacity to contributethat have the capacity to contribute. Page 2
  3. 3. Structuring the Best Social Benefit Bond Fundamental considerations for any Bond including an SBB: 1 What is the need?1. What is the need? 2. Who is the Issuer/Sponsor? 3. What do Investors want? 4. Who are the likely Investors? 5. What are the key terms of the Bond? Page 3
  4. 4. The Benevolent SBB - Bond Terms Issuer Perpetual Corporate Trust ATF The Benevolent Society Social Benefit Trust No. 1 P Si $10Program Size $10m Service Provider The Benevolent Society Note Tranches $7.5m Class P Notes – Moderate Risk Note Tranches $2.5m Class E Notes – High Risk Use of Funds To provide family preservation services over 5 years. Note Maturity 5 years, in line with payment from NSW Government.Note Maturity 5 years, in line with payment from NSW Government. Interest Repayments For all notes payable on maturity – exact rate of interest dependent on assessed performance P i i l For all notes, principal is due on the maturity date. Principal Repayments For all notes, principal is due on the maturity date. Class E principal is 100% at risk to performance and is subordinated to Class P. • The following two slides provide a high level overview of the funding structure and the risk and returns to Investors. Page 4
  5. 5. Funding Structure NSW GovernmentNSW Government Class PClass P The Benevolent Society (Service Provider) The Benevolent Society (Service Provider) Special Purpose Vehicle Special Purpose Vehicle NotesNotes Class EClass E InvestorsInvestors Allocated FamiliesAllocated Families NotesNotes ► Bankruptcy-remote Special Purpose Vehicle (‘SPV’) established to provide the Services. ► Investors to subscribe for Class P and Class E on day 1. Total of $10m in notes issued. Government provides a standing charge for services (being a prepayment for minimum service delivery) ► TBS will provide the services over 5 years, and will regularly draw down investor funds to pay for the services to be provided to the allocated families. ► At the end of the 5 years, the NSW Government will pay the SPV a final performance payment. The amount of the payment will be based on the performance of the program If the program is assessed as a “fail” (attached to a relativepayment will be based on the performance of the program. If the program is assessed as a fail (attached to a relative improvement compared to the control group of less than 5%) then government provides no further funds. This payment allows principal redemption and interest returns. Page 5
  6. 6. Investor Risk and Reward Risk Level Risk vs Rewards* Cl P M d t Capital Protected. Interest payable at Bond maturity. Interest Class P Moderate Capital Protected. Interest payable at Bond maturity. Interest yield variable. – possibly zero (per annum compouding). Class E High 100% Capital at risk. Interest payable at Bond maturity. Interest yield variable (per annum compounding). Performance Class Performance Improvement Interest Return Class P (p.a.) Interest Return Class E (p.a.) Fail < 5% 0% 0% Baseline >=5% <15% 5% 8% Good 1 >=15% <20% 6% 10.5% Good 2 >=20% <25% 7% 15% Good 3 >=25% <35% 8% 20% Good 4 >=35% <40% 9% 25%Good 4 >=35% <40% 9% 25% Outperform >40% 10% 30% Page 6
  7. 7. Structuring the BenSoc Social Benefit Bond 1. What is the need? Compelling features:Compelling features: • NSW Government sponsorship and active endorsement • Out of home care (Foster care). Recognised social challenge 2. Who is the Issuer/Sponsor/Service Provider/Advisors? Compelling features: • Benevolent Society NSW G t i l t• NSW Government involvement • Westpac and CBA partnership Page 7
  8. 8. Structuring the BenSoc Social Benefit Bond 3. What do Investors want? Issues:Issues: Typically they look for large, conservative, secure , well rated and liquid investments. Unfortunately we could not address all of these needs. Solutions: 1 A ti d t b th NSW G t1. Active endorsement by the NSW Government. 2. Capital protected tranche for 75% is expected to increase Investor appetite 3. Higher risk tranche investors include BenSoc, The Westpac Foundation and the CBA.g p Page 8
  9. 9. Structuring the BenSoc Social Benefit Bond 3. Who are the likely Investors? O hOur approach: 1. Engage with Key Foundation Investors in the design of the instrument. 2 Focus on the likely Investors2. Focus on the likely Investors The likely outcome:y • It is our expectation that the high risk tranche is likely to be sold to Benevolent Institutions as it is consistent with their mandates. • The lower risk tranche is Capital protected. It is likely to appeal to Investors that are unable to handle principal volatility but are happy to have their interest return at risk. Page 9
  10. 10. Structuring the BenSoc Social Benefit Bond What are the key terms of the Bond that are likely to attract Investors? Given the unique nature of our project and also our understanding ofGiven the unique nature of our project and also our understanding of Investor preferences we have incorporated: 1. Capital Protected tranche. 2. Well respected Corporate Trustee 3. High Risk tranche largely sold so we can focus on the Capital protected tranche. 4. Endorsement by the NSW Government 5. Well structured agreement to ensure there is no dispute on terms at maturity 6 St l ti t ( lb it t t ll )6. Strong relative returns (albeit not stellar) Page 10
  11. 11. Managing the Bond: end to end. 1. Select your partners and key transaction managers carefully. 2. Engage with Government early and actively. Reach agreement on project form andg g y y g p j standards as soon as possible* 3. Partners should have a strong organisational endorsement for the project. 4. Engage with potential cornerstone investors early.g g p y 5. Develop a clear timetable and obtain agreement to allocated tasks across all interested parties* 6. Ensure that the contractual requirements for the provision of the required services are6. Ensure that the contractual requirements for the provision of the required services are clear and understood and are agreed early in the process* 7. Engage general investors (i.e. not cornerstones) only once you have a final deal to sell* 8 Ensure that each partner has sufficient resources at the right time to deliver on their8. Ensure that each partner has sufficient resources at the right time to deliver on their obligations 9. Get on with it (look out for deal fatigue) * * Areas where we could have done better. Page 11
  12. 12. Might anyone guarantee the Bond? 1. The Senior Tranche of the BenSoc SBB is Capital Protected not Guaranteed. The difference is that the cash flows of the transaction are creating the protection of it l t th tcapital not the government. The structure of our transaction was designed to channel cashflows to ensure that the transaction has sufficient residual cash to ensure repayment of the principal amount. 2 G t ill b l t t t t thi ff ti l b2. Governments will be reluctant to guarantee as this effectively becomes a conventional government liability rather than a liability that is linked to ultimate performance. This is consistent with Government approach to infrastructure finance which requiresThis is consistent with Government approach to infrastructure finance which requires risk sharing to be exhibited. 3. Other alternatives? Philanthropic or other socially minded Institutions could provide a full or partialp y p p guarantee. Experience in the US with the Rikers Island Recidivism Social Impact Bond is that Bloomberg Philanthropies will make a $7.2m grant to underpin the repayment of the l th t G ld S h i ki t thi j t Thi i i il t th i k itiloan that Goldman Sachs is making to this project. This is similar to the risk position being taken by BenSoc , the Westpac Foundation and the CBA on our SBB. Page 12
  13. 13. Key challenges to address in the future. 1. We need to challenge Conventional thinking in investment behaviour. 2 “ ’ G ” ( )2. “It’s the Governments responsibility” (actually its our responsibility) 3. Penetration of SBB’s to all investors directly 4. Refresh Investment Managers mandates; Investors (i.e. YOU) should demand that your Super fund Manager is engaged in this asset classasset class. 5. Experience and Performance. The market will develop around major players and the experience of their Bonds. 6. Size and Credibility. 7. Ratings and Liquidity Page 13

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