MICROCAPITAL STORY: Merrill Lynch Community Development Company Invests $10m in Fixed-Income Securities Offered through the Calvert Social Investment Foundation

Merrill Lynch Community Development Company (MLCDC), a for-profit development-focused subsidiary of Merrill Lynch & Company, Inc., has invested USD 10 million in Calvert Community Investment (CCI) notes, which are fixed income products issued by the Calvert Social Investment Foundation, a development non-profit located in Besthesda, MD. The MLCDC investment will finance about twenty microfinance institutions (MFIs) that are expected to provide micro-credit over 25,000 female entrepreneurs in developing nations. The initiative was announced at the recent 2008 Clinton Global Initiative (CGI) summit, an annual gathering of global leaders in government, business and civil society for the purpose of discussing pressing development challenges and their solutions. In 2007, Merrill Lynch and the Calvert Foundation agreed to sell CCI notes to Merrill Lynch clients, harvesting over USD 1.5 million for community investment in the first month of the program. Merrill Lynch agreed as part of this 2007 commitment to provide matching investments of up to ten percent of the CCI notes sold by its financial advisors. The matching funds are intended to provide security to Merrill Lynch’s investors in the event of a loss.

Similar to a certificate of deposit (CD) issued by a commercial bank, CCI notes may be purchased for a pre-determined length of time, after which investors recoup principal plus a fixed rate of interest. Whereas banks traditionally use CDs and other traditional fixed-income investments to capitalize what they hope will be profitable business ventures in the hopes of earning a fair financial return, the Calvert Foundation uses CCI notes to fund socially-conscious enterprises in order to reap both financial and social rewards for its investors. CCI note purchases are pooled into a managed portfolio of micro-credit loans available to over 200 organizations working in over 100 countries to alleviate poverty, fund small businesses, strengthen existing infrastructure for education and healthcare and to promote environmental sustainability. Investors may specify in what regions and projects their funds are invested.

CCI notes are sold in denominations of USD 1,000 or more for terms of one, three, five, seven or ten years. These products allow investors to determine their own fixed rate of interest, which may range from zero to three percent. According to the Stanford Social Innovation Review, investors are constrained to choose an interest rate between zero and two percent for one- and three-year notes or between zero and three percent for longer-term notes. Since these rates are below market rates of return, investors are in a sense asked to accept as a part of their compensation a “social return,” or positive community impact. Over fifteen percent of investors choose to earn a zero return in order to allow the full value of the principal to be lent out again to micro-entrepreneurs.

Founded in 1988, the Calvert Social Investment Foundation, a non-profit based in Bethesda, MD, creates financial products and services in order to channel capital to underserved communities. For the year ending December 2007 (p. 2), Calvert possessed USD 169.2 million in total assets, of which USD 104.1 million is listed as “notes receivable,” net of loan losses. On the liabilities side (p. 3), Calvert had USD 119.2 million listed under “Community Calvert Investments (CCI) notes payable.” Calvert issued USD 29 million in loans and giftshares (p. 5). On its website, Calvert boasts a 99.8 percent repayment rate to its borrowers.

Formed in 2001, the Merrill Lynch Community Development Company (MLCDC) aims to provide financing and support to underserved communities by establishing strategic partnerships with business and community leaders to develop projects that benefit low- and middle-income areas and individuals, especially those in California, New York, New Jersey and Utah. MLCDC is a for-profit subsidiary of Merrill Lynch & Company, Inc. (NYSE:MER), an investment bank founded in 1914 in New York City that manages USD 1.6 trillion in assets. Based on Merrill Lynch’s June 2008 quarterly financials, the bank provides a -1.85 percent return on average assets and a -83.74 percent return on average equity, which may have something to do with the fact that between July 2007 and July 2008 Merrill Lynch lost USD 52 million each day. Total debt-equity was 1605.4 percent.

Additional Resources:

Calvert Social Investment Foundation

Calvert Social Investment Foundation: Audited Financial Statements

Calvert Social Investment Foundation: CCI Notes

Calvert Social Investment Foundation: Prospectus on Calvert Community Investment Notes, April 30, 2008.

Forbes: “Merrill Lynch Community Development Company Invests $10 Million to Provide a Boost to International Microfinancing Through Calvert Foundation”

Merrill Lynch Bank USA

Merrill Lynch Community Development Company (MLCDC)

The New York Times: “Chief Struggles to Revive Merrill Lynch”

Stanford Social Innovation Review: “Calvert Community Investment Notes take social investing mainstream”