Non-rated Impact Bonds on the Austrian Capital Market: The Example of the Don Bosco Ecuador Bond
The Austrian NGO Jugend Eine Welt has been active in the field of impact investing since 2006. Initial steps in this direction originated from fundraising activities for a wide variety of education projects implemented by the Salesians of Don Bosco, one of the three largest Catholic religious orders for men with approximately 15,000 members in 133 countries. During the expansion of the Universidad Politécnica Salesiana (UPS), a private university founded in 1994 by the Salesians of Don Bosco in Ecuador which has social schemes for low-income students, it became clear that a soft loan can have far greater impact than a donation. As a result of this realisation, Jugend Eine Welt was able to convince the former Investkredit Bank AG in Austria of the merits of this project and the first loan, a sum of 5.2 million US dollars, was transferred to the UPS as a classic form of bank financing. In the years that followed, foundations began to show interest in the social undertakings of the order in Ecuador, and besides the UPS two Don Bosco print shops and a programme of microloans were supported with loans.
In 2009, the first Don Bosco Ecuador bond was issued on the Austrian capital market as a private placement. The aim was to make another loan available to the UPS for further extension work. Jugend Eine Welt devised the project in cooperation with Raiffeisen-Landesbank Tirol AG, thus reaching a significant milestone on the way to solving a number of legal difficulties including the problem of prohibited deposit business as defined in § 1 Section 1 Item 1 BWG (Austrian Banking Act). Specifically, by issuing a bond it is legally permissible to collect capital from several investors, a procedure which, outside the context of securities, is permitted solely to banks with the appropriate licence (§ 1 Section 1 Item 3 BWG). Don Bosco Finanzierungs GmbH, a non-profit subsidiary of Jugend Eine Welt also founded in 2009, took on the role of issuing institution for this bond. Raiffeisen-Landesbank Tirol AG participated as lead manager and managed the sale of the bond with a coupon of 3.875% p.a. over 6 years. The primary target group was church investors in Austria, and these contributed a total of 6.3 million euros to the project. The minimum investment was set at 100,000 €. In November 2015 the bond was repaid, marking a successful example of cooperation between the NGO sector, the finance industry and the Roman Catholic church in Austria.
Beginning in 2009, the UPS was able to offer places to 7660 additional students. At the start of the 2015/2016 academic year, 23,557 students were enrolled at three sites in Quito, Cuenca and Guayaquil. Since the full capacity has not yet been exhausted, the Salesians of Don Bosco in Ecuador have asked Jugend Eine Welt for further funding assistance for a third phase of expansion. Because the legal and regulatory stipulations were becoming increasingly stringent, Raiffeisen-Landesbank Tirol AG was no longer able to support a further Don Bosco bond as a project partner. In cooperation with Erste Bank Group AG, a leading financial services provider in Central Europe, two new bonds, one in euros and one in US dollars, were issued from 2015, both of which run until 29 June 2021 and carry an annual coupon of 1.5%. With these bonds, Jugend Eine Welt aims to provide 10 million euros for the UPS. Issuer is again Don Bosco Finanzierungs GmbH, although Erste Bank Group AG is not lead manager but paying agent in order to obviate any liability risks.
Despite positive developments such as the introduction of a new Alternative Funding Act in the second half of 2015 to regulate alternative forms of funding for start-ups and SMEs, it is becoming increasingly difficult to place non-rated impact bonds not covered by the securities prospectus requirement and stipulating a minimum investment of 100,000 €. It is indisputable that Don Bosco Finanzierungs GmbH is receiving support from several individuals in Austria and Germany who are interested in the topics of impact investing and ethics and sustainability in the financial sector. Without the committed involvement of individual banks and financial experts it would have been practically impossible for Jugend Eine Welt to achieve this track record going back years. This was an essential pull factor in this process that gained additional momentum following the financial crisis of 2007. On the other hand, there are a number of push factors hampering the progress of impact investing in Austria. These include consultants’ liability which dissuades banks from selling the product, non-investibility in the trust sector which is precluded by law and affects insurance firms, provision funds and other funds, and the high minimum subscription rate because, for reasons of cost and owing to its small volume, it is a private placement. Ultimately the sale is possible only in one segment of qualified private and institutional investors who have genuine faith in Don Bosco as a name and are willing to invest with no financial rating and to bear the risk of default themselves.
This paper presents a discussion of the pull and push factors that accompany this process. It is based on qualitative interviews with five bank and financial experts with connections to Jugend Eine Welt. These interviews give a clear picture of the current situation faced by non-profit organisations wishing to be active in the field of impact investing in Austria in a wide variety of sectors such as development cooperation and social entrepreneurship. There is enormous potential for successful cooperation at this point of contact with the world of finance and business. The international financing system sees itself in a period of transition, and not just because of recent calls for divestment. Some investors have already been incorporating ESG-based approaches into their investment decision-making for years. What impact investing still lacks is an appropriate legislative framework and consequently products wholly acceptable to both institutional and private investors.
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