Catholic bonds are instruments utilized to finance various catholic institutional projects. These projects might include capital improvements, new construction or debt refinancing for schools, churches or social ministries.
Whether you are an issuer, an investor or just a church parishioner, this site is dedicated to providing you with information on Catholic Bonds.
What is a Catholic Bond?
A catholic bond, also commonly referred to as a church bond, is a debt financing instrument similar to a bond issued by a municipality but with some key differences. The main difference is that catholic bonds are generally issued by a non-municipal entity (such as a Catholic diocese). The catholic bond is a legal instrument that promises the return of principal plus interest. The instrument has a term with a stated maturity. The debt / promise to repay is generally backed by some form of collateral or guarantee. The funds raised by the issuance of catholic bonds are utilized to finance various projects for catholic institutional organizations. These institutions include large organizations such as hospitals to small apostolates such as schools or clinics. Catholic bonds allow charitable ministries access to cash in order to fund important initiatives that might otherwise take years to finance.
The most common issuers of catholic bonds in the United States are diocesan entities or dioceses. In the United States there are over 190 Catholic dioceses. Many dioceses have charitable entities that provide important social services and ministerial functions within their geographic communities. In fact, the Catholic Church is among the largest provider of social services in the United States and world-wide. In a 2013 broadcast of NBC’s Meet the Press, former Oklahoma Gov. Frank Keating (R) stated that “in the United States, 50 percent of social services are provided by the Catholic Church.”
The church provides the faithful and the general public a wide-array of services including, but not limited to, education, healthcare, adoption and foster care, rehabilitation and counseling, affordable housing and even solar power.
Why Catholic Bonds?
Catholic dioceses or diocesan entities might consider issuing a catholic bond to help pay for an important project. As stated above, catholic bonds allow charitable ministries access to cash now in order to fund important initiatives that might otherwise take years to finance.
For example. let’s suppose the fictitious Diocese of the Conch Republic has within its ministry a diocesan entity responsible for housing the poor called the Affordable Housing Corporation. Let’s call the entity the AHC. The AHC has a shortage of housing units available for its growing population and wants to build new affordable housing units. The Diocese and AHC have identified several options for addressing the housing shortage, (i) appeal to local parishioners for donations, (ii) go to a bank and attempt to obtain conventional financing terms, or (iii) issue catholic bonds by leveraging existing assets to finance the construction of the new housing units.
Raising money from parishioners can work really well and doesn’t involve taking on new debt. However, raising funds for one project might preclude raising funds for another. Also fundraising can be costly, takes time and is not guaranteed to result in the needed cash for the project. Conventional financing at a bank often limits the uses of the funds placing unreasonable restrictions on the borrower. The bank terms can be cumbersome and the interest rates may or may not be competitive enough to justify the expense.
Catholic bonds however may allow the AHC to benefit from the immediate financing at competitive interest rates while providing for some flexibility in the use of funds. The catholic bonds offer some unique opportunities for debt repayment and in some cases forgiveness. For example, one possibility is that catholic bonds might be bundled with a charitable giving program and potentially forgiven through estate bequests. Also the diocese itself can be an investor and benefit from lending activity without depleting its cash reserves or deposit and loan funds.
Of course, as with any major financing or investment consideration, the issuance or investment of catholic bonds requires due diligence and a careful analysis of all associated risks and benefits.
Catholic Bond Prospectus and Instruments
Similar to a mortgage, financing through the issuance of catholic bonds requires carefully drafted paperwork and legal instruments. If a catholic bond is backed by a security interest in real estate there may be a mortgage or deed of trust. There might also be a UCC-1 filed with the collateral state to perfect a security interest in personal property associated with the real estate or development. If a Diocese is the ultimate issuer and the bonds will benefit a parish or sub-entity there will also be a Promissory Note and Direction to Pay. A number of other documents such as corporate resolutions, IRS memorandum, blue-sky opinions and compliance forms are likely required in any particular issue. But before any deal can proceed the two foundational documents are the Trust Indenture and the Prospectus.
The Trust Indenture is the governing document that authorizes the issuer to issue. The Trust Indenture also provides for investor recourse in the event of a default under the terms of the indenture or under the other security documents. The indenture defines the terms, obligations, responsibilities and scope of the financing. It’s the soul of the deal.
The Prospectus (also referred to as a circular) is the document that investors will most likely rely on when deciding whether or not to invest in a particular deal. The Prospectus outlines the essential terms of the issue and provides financial statements of the issuer, borrower or guarantor (and any other essential party to the deal). The Prospectus also provides details on material risks or facts that might adversely impact the issuer or borrower’s ability to pay, or that might negaitvly impact the value of the collateral. The Prospectus will list any other potential risks to the project (such as pending litigation, assessments or other material issues or facts). Statutes or regulations may vary by state but generally require specific details in the Prospectus based on the issue amount and issue terms.
Catholic Bond Charitable Placement
As mentioned briefly above, it’s possible for a catholic bond to be purchased by a donor-investor or investor-donor. The difference is a nuisance but basically the donor-investor might be a parishioner or donor of the diocese. The donor-investor might also be an entity associated with the diocese or a trust. The donor-investor might purchase the catholic bond and potentially gift back or forgive any combination of principal or interest before maturity. This means that the issuer’s debt service would be reduced. However, the donor-investor would still retain some combination of the security interest and value (either current interest payments or a lump sum payment on maturity).
An investor-donor on the other hand can be described as an investor who elects to receive all principle and interest payments during the term of the bond. However, the investor-donor might agree to forgive all or a portion of the principal on maturity or from his/her estate upon death. The bond would be placed into some form of charitable trust where the investor-donor receives disbursements during the term of the bond but where the title to the bond reverts back to the issuer upon some occurrence or event (such as maturity or upon the death of the investor-donor). These are just a few examples of opportunities associated with a catholic bonds.
To learn more please about catholic bonds please be sure to sign up for our newsletter or send us an inquiry.
Nothing herein contained is intended to provide legal or financial advice. The information provided is for educational or informative purposes only. Always consult your attorney or appropriate financial professional before making any investment decisions.