Ford’s $1 Billion Bond Offers Lessons for Others Looking to Use Debt to Increase Grants

The Ford Foundation’s $1 billion bond offering to finance additional grants over the next two years is a transaction most grant makers wouldn’t be able to make, but smaller philanthropies can still learn from the legacy foundation’s use of debt, according to a new report.

Using past market performance as a guide, Ford’s use of leverage will likely allow it to make more grants over the 30-year terms of the debt (which can be extended to 50 years), according to an analysis by Seachange Capital Partners, a nonprofit financial-services group. Ford issued debt instead of digging into its $12.2 billion investment portfolio to make $1 billion in extra grants over the next two years. By not reducing its endowment, Ford should be able to generate enough income to cover debt payments and increase grant making, the report said.

The $12.2 billion investment portfolio was provided as an estimate in Ford’s preliminary offering paperwork, posted on the Munios website, and shows a decline since the beginning of the year of about $1.5 billion.

The report offers a few scenarios to show how Ford’s grant-making budget could increase because of the use of debt. If Ford’s endowment experiences a zero return on its investment over the life of the bond, Ford’s ability to make grants will be reduced by the $840 million in interest payments needed to satisfy its debt. However, if the endowment generates a 6 percent rate of return, it will free the foundation to make $1.7 billion in additional grants.

Ford’s size and professional financial staff make it unlikely that a smaller grant maker, with assets less than $1 billion, could issue debt for a similar proportion of its assets without taking on prohibitive fees and expenses, the report said.

But if “a critical mass of interested foundations” pooled debt, they might
be able to increase grants in the short term and lock into low interest-rate payments, the report said. Previously, nonprofits have worked together on common debt offerings to do things like support new capital investments. The report suggested the same approach could be used to increase the flow of money to nonprofits.

“Philanthropy is under pressure to do more, and interest rates will not stay low forever,” the report states. “It would be a shame to miss the window for a lack of trying.”