Charitable Bonds Programme: evaluation

2. Overview of the Charitable Bond Programme

2.1 Investment in Charitable Bonds to date

Launched in 2014, the Charitable Bond is a policy instrument explicitly designed to deliver affordable social housing and to recycle interest into grant funding for further affordable units. To date, a total of £584.8M has been invested by the Scottish Government in the Charitable Bond Programme. This has delivered over 5,000 new homes for affordable rent across Scotland. We describe how the programme operates in this section and the evaluation is set out in section 3.

2.2 Governance Arrangements

The Charitable Bonds programme is delivered, and the bonds are loans are arranged by, Allia C&C, an FCA regulated firm within the Allia Group, and the bonds are issued through Allia Social Impact Investments Limited (ASIIL) controlled by Allia Ltd. ASIIL was established solely for the purpose of issuing and making loans and grants to charities.

Allia C&C’s appointment followed a procurement process to appoint an FCA approved Contractor in relation to the ‘Supply of Investment in Charitable Bonds’ with the skills and experience to deliver a bond programme and manage the loan portfolio over the lifetime of the bond investments. The current contract is from November 2022 to November 2026.

The issue of each bond facilitates loans for the provision of social housing. The loans are funded by the Scottish Government and the interest generated from repayment of the loans by the borrowers is ringfenced and recycled as Charitable Donations to support additional affordable housing projects through grant. Diagram 1 below illustrates the key relationships within the programme.

This confirms key relationships involving:

• Bond element – this is between Scottish Government and the bond issuer, in this case ASIIL. Allia C&C arranges the bond issue, supporting processes and documentation. This provides the initial funding required to offer the loan and make the donations.
• Loan element – this is between the RSL and ASIIL. As the lender, ASIIL conducts due diligence checks with a prospective RSL and makes a recommendation to Scottish Government, which has responsibility for the investment decisions. Scottish Government approves all loans to ensure that loans will be used to fund strategically agreed housing projects.
• Donations element - the charitable donations are administered by ASIIL but Scottish Government approves all projects and, importantly, directs where the donations are allocated. Each project to receive a charitable donation goes through the same appraisal and approval process as a project funded through the Affordable Housing Supply Programme (AHSP) and all projects are recorded on the Scottish Government’s project management system HARP with the units counting towards the 110,000 target.

2.3 Roles and Responsibilities

The contract sets out more detail in relation to the distinct roles and responsibilities of Scottish Government and Allia C&C to successfully deliver the Charitable Bond programme, and these are summarised in the table overpage. The contract also includes the specification of services which in summary include:

• Pricing loans to Scottish RSLs on competitive terms and conducting credit reviews of potential RSL borrowers;
• Producing and executive relevant legal documentation and handling the administration of bond subscriptions;
• Maintaining registers and managing and receiving payments including making donations and recovering donated funds; and,
• Providing ongoing monitoring of the loans and the credit of borrowers and ensuring timely loan repayments and making payments to bondholders and reporting regularly to Scottish Government.

The contract also includes a pricing schedule, details of key individuals, ordering procedures prescribing the arrangements for ordering services and the arrangements for the strategic management of the relationship between the Parties.

2.4 A worked example

The contract stipulates that ‘Allia will issue and promote limited recourse bonds open for investment by Scottish Ministers’. Limited recourse means each series of bonds funds a single fixed rated loan to a single RSL and so recourse is limited to that RSL only meaning there is no cross-risk between borrowers across the programme.

The contract also stipulates that the bonds are to be issued on:

• A fixed term basis of between 5 and 15 years; and that,
• At the end of the bond term, Scottish Government will receive back their full investment plus a rate of return which per the current contract is 0.1% simple interest per annum on the total value of the bond.

The bond itself is a zero‑coupon bond which mean it pays no periodic interest (no coupons) during its life. Instead, it is issued at a discount (e.g., buy for £60, get £100 at maturity) and repays full face value at maturity. The yield that comes from the bond is entirely from the price difference i.e the difference between what you pay and what you get back is the return.

To be eligible to receive a loan, RSLs must (amongst other things) be registered with the Scottish Housing Regulator (SHR) or Homes and Communities Agency (now Homes England) and use the loan to construct more new affordable rented homes in Scotland. As previously stated, all projects must be on HARP and the relevant local authority Strategic Housing Investment Plan (SHIP) or else be deemed strategically significant by Scottish Government.

The loans are provided to RSLs on an unsecured basis with either interest on the loan element rolled up (on a compounding basis) and paid by the RSL at maturity together with the principal or, more recently, fixed repayments made on a basis pre-agreed with the RSL.

It is worth noting here:

• The contract specifies “Charity” though in practice the bonds issued have been to Registered Social Landlords “RSLs” only with the exception of the Wheately Housing Group as the parent (registered) company of four RSLs (Glasgow, South, East and Loretto).
• The limited recourse and zero-coupon feature of the bonds, the unsecured nature of the loan and the interest rate mechanism are key features and these are discussed further in the evaluation.

The contract provides the following example - £5M borrowed from a 10-year Bond at an interest rate of 3.4% requiring a total Bond Investment of £6.916M and a total repayment of £6.985M by the borrower at the end of the bond term. This generates a Charitable Donation of £1.916M plus a return of £0.069M to the Scottish Government.

The contract stipulates that the Charitable Donation generated can be aggregated up rather than issued immediately after each bond closes and that Scottish Government may choose to direct the contractor to hold some or all of donations in abeyance until Scottish Government is ready to act. There is currently a balance of £25M held, not yet allocated.

The charitable donation is recognised in the RSL accounts as a capital grant which is amortised over the life of the affordable homes created (typically 50 years+). This is in line with the accounting statement of recommended practice, which is the accounting framework applicable to all RSLs.

2.5 Costs of Service Delivery and Contract KPIs

Costs to deliver the contract include a placement fee, legal fees and annual management fees. These costs are commercially sensitive and so are not set out here in detail, suffice to note here that these costs are met by the borrowers and not by the Scottish Government. This means in the example above the £5M borrowed would be drawn, net of expenses. If for example the expenses were £50,000 the actual amount remitted to the borrower would be £4.950M.

The contract sets out the requirement for monthly contract meetings and performance reports are required quarterly in electronic format within 15 days of the end of each Quarter. This is to include a “top level summary of performance” with supporting documents sufficient to measure the performance of the Contract against all KPIs and Objectives.

In addition to the reporting requirements, it includes arrangements for dispute resolution, data handling, quality assurance, continuous service improvement, invoicing, mobilisation and sets out the key performance indicators (KPIs) against which the contract is managed.

The KPIs stated are listed below. These are useful to note as they include some key timescales e.g. funds distributed to charities within 30 days of direction by Scottish Government.