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The Wall Street Journal reports (10-7-2006; pg. B3) that churches are venturing into ‘asset securitization,’ which is a fancy term for repackaging groups of church bonds. Strongtower Financial, of California, created various groups of bonds from 28 churches, and resold them to investors.
In theory, this lowers the risk of an individual church’s default — better to own a group of 56 bonds than put all of your eggs in one basket. Still, Strongtower’s securitized bonds got a Baa2 rating from Moody’s, which implies some element of ’speculation,’ according to these definitions. Moody’s highest rating is Aaa1.
At least two church features could lead to the lower ratings: 1. large churches tend to be pastor driven, and the death or departure of key figures can undo financial plans, and 2. the resale market for a used megachurch is next to nil. So, if the church is suddenly unable to pay its bonds from the offering plate, its pretty rare that there would be enough physical assets to cover the payments. But, Strongtower’s CEO, Chester Reid, says churches have a moral obligation to pay off the loans, and that Strongtower hasn’t had a church foreclosure since 1993.
One thing the article does not discuss is the amount of regulation Strongtower’s new securities entail. Generally, non-profit organizations can issue bonds without subjecting themselves to [all of the federal] securities regulations. This substantially reduces the burdens on local churches. A public offering of new securities backed by church bonds, however, gets treated like other securities, if I recall the exemption correctly. While Strongtower probably bears the brunt of this burden, I wonder if the congregations that issued the bonds have agreed to more rigorous financial reporting.
But, securitization is probably a good thing, if it allows churches to get loans from investors who wouldn’t buy bonds from a single church. Hopefully, lower risk translates to lower interest rates for the churches. The decision to use debt is a thorny issue all by itself, but for churches using debt to expand, this may be a helpful development.
*Later: Re-reading this, I’ve changed it to make it clear that the exemption isn’t for all regulation, it’s just some of the most onerous federal regulations. I know of at least a couple of churches that have unintentionally wandered into a mess when they forgot about state securities regulations.
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