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. 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.
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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?
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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.
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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.
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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%
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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
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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
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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.
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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)
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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.
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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.
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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
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