Wednesday, May 03, 2006

Media Development Loan Fund socially responsible investor notes - first SRI instrument listed on major exchange and first SRI derivative instrument

(Update, May 4, 2006: I don't think I made things sufficiently clear in my post below. This MDLF security is a very big deal in the world of international development and nonprofit finance. It is, so far as we're able to tell, the very first time a socially responsible investment financial instrument has been listed for public sale and trading on a major exchange. Further, it is the first time that socially responsible investing has created a publicly traded derivative instrument - the underlying security is a swap note. The ability to market through a leading Swiss private bank directly to its wealthy customers but then to have the guarantee - from the Swiss government no less! - of a secondary market and resale before maturity, makes it a very special financial instrument. These are extraordinary innovations in the world of development finance, international development, microfinance, and the nonprofit capital markets. This is very, very, very, very, very, very cool. See this description of the security, here (reproduced at bottom of post), and an editorial from the Kenya Times, here.)

When not engaged in academic work on international law, my primary pro bono activity is as board chair of the Media Development Loan Fund. MDLF is the world’s largest media assistance organization devoted to helping independent media around the world – i.e., media that devotes a substantial amount of attention to objective news reporting, is not owned by the government, the political parties, or the local mafia – achieve financial independence.

MDLF is a nonprofit venture fund – a private equity fund investing in media in emerging markets and developing democracies with a nonprofit mission. MDLF is a cutting edge organization at the intersection of human rights, international development, and finance.

MDLF starts from the assumption that independent media means financially sustainable, profit-generating, well-run businesses in the private sector – and hence devotes itself to the business, managerial, and financial issues of the media business. It has been in business for ten years, and now has over $25 million invested, mostly in loans but increasingly in equity investments. MDLF supports B92 in Belgrade, El Periodico in Guatemala, internet news projects in Indonesia, the Mail & Guardian in South Africa, Novi List in Croatia, many regional newspapers in Russia, and many other projects around the world. We have traditionally been a very low profile organization, but are starting to raise our visibility level.

(MDLF, I should add, is the most exciting NGO project I’ve ever been involved with in my long career working with NGOs. I’ve never seen anything like it anywhere in the world – ferociously devoted to its mission, but also as disciplined as any commercial private equity fund; the most geographically dispersed and genuinely transnational NGO I’ve ever dealt with, with the CEO in Singapore, offices in New York and Prague, the finance department in Warsaw, our development person in Geneva, our public affairs officer in Britain. One of the benefits for me as an academic teaching international business transactions, corporate finance, and private equity, as well as nonprofit organizations, is that it supplies me with a steady stream of financings and complicated transnational private equity transactions that I adapt for my classes – it helps a lot to have a pro bono finance practice, if you teach IBT or private equity. The fact that they are emerging market and developing democracy transactions adds a frisson of political and legal risk that is fun for students – see my last IBT final exam, here. I may as well say it publicly, on a blog mostly devoted to public international law – I like finance! And I think public international law scholarship would benefit if more scholars bridged the public-private law divide, because it seems to me hard to understand the material drivers of public international law arising from economic globalization without understanding international business. There, I’ve said out loud what I’ve been thinking for a long time.)

But here’s the long term funding problem. MDLF started out with funding from George Soros’ Open Society Institute, where once upon a time I served as General Counsel. It has expanded to very significant funding from other foundations, the European aid agencies, and so on. As it has grown, its relative efficiency has grown steadily – administrative costs as a percentage of investments have steadily gone down. The problem is, in absolute terms, we have gradually outgrown the sources of capital available to MDLF in the traditional nonprofit capital markets – i.e., philanthropic sources, even government aid agencies. It might be different if we were able to crack open the World Bank or the regional development banks, but we haven’t so far been able to do that.

MDLF has a significant advantage in having Soros as its strategic business advisor. His advice has consistently been that MDLF needs to grow itself as quickly as possible into a fund large enough to support its administrative expenses through its own revenues. Now, development finance folks will immediately understand that this is the Holy Grail of self-sustainability (I’ve written a little about it, at SSRN here). There is a large debate in the microfinance world over whether this is desirable and whether, for most organizations, it is even possible (short answer, for most organizations, no).

MDLF is different, however – in some respects it resembles microfinance, but in many critical ways, it is different. Unlike the tiny, tiny loans of microfinance, MDLF typically invests hundreds of thousands, often millions of dollars, in a transaction. The investments are in working businesses, often secured by equipment and other collateral (not that one would want to have to enforce those liens in local courts very often!). The economies of scale are simply different from microfinance. MDLF makes subsidized loans and always will. Increasingly, however, it also makes equity investments. Sometimes those equity investments are designed to protect our lending by giving us control stakes through equity. But increasingly the equity investments are designed to allow us to capture a greater amount of the upside on an investment, something that is more in line with the in fact very sizable risks taken – risks which are essentially equity risks even if the investment is a loan.

On the other hand, a feature of emerging markets where we work is that the usual exit strategy of a sale into the public equity markets does not exist, and it turns out that the only real exit strategy is to collect interest on the loans for the long term, i.e., no exit. But we are aiming at capturing sufficient upside, largely in equity investments, to get us ever closer to self-sustainability.

So where to find capital when you outstrip the traditional nonprofit capital markets? Like many other development finance organizations, including microfinance, we are seeking to tap the public capital markets. We have taken two steps in that direction. One is the issuance in the US of investment notes, with the help of the Calvert Fund, that essentially offers a below-market note to the US retail investor (see bottom of this post for links) – Calvert has thoroughly worked out this socially responsible investor product. (See this Roger Alford post on SRIs, at Opinio Juris, here.)

The second step is the subject of the Financial Times article, below. In Europe, working with a socially responsible investor group, ResponsAbility, and a leading Swiss private bank, Vontobel, MDLF has just issued the first listed NGO development finance financial instrument of its kind supporting media development. (See the Vontobel press release, here.) It is a note in which, for each dollar invested, 80 cents pays a safe money market return, and 20 cents goes to MDLF, which pays a small amount of interest on that portion. Vontobel and the Swiss government aid agency undertake to provide a secondary market.

It is essentially a socially responsible investor product, in which investors accept a below-market return. But it is a first in its financial structure, and in the fact that it is marketed in Europe, to (very) wealthy clients of a leading Swiss private bank, rather than to the retail market in the US. MDLF is extraordinarily excited by the possibilities of this note. And my personal congratulations as chair of the MDLF board to everyone at MDLF, ResponsAbility, and the Vontobel bank for all the work and creativity that went into creating this innovation in development finance.

'Social' bond will benefit emerging free press

By Joanna Chung in London
Financial Times

(Published: May 3 2006 03:00
Last updated: May 3 2006 03:00)

A new financial product aimed at promoting independent media in developing countries will be listed on a stock exchange for the first time, Vontobel, a private Swiss bank, said yesterday.

Vontobel has teamed up with social investment specialist ResponsAbility, to create a security that will give investors a fixed-interest return as wellas a "social" return.

It is due to be launched on the Zurich stock exchange on May 18 after subscription starts today. Twenty per cent of the capital raised will be channelled by the New-York based Media Development Loan Fund (MDLF) into loans to independent media outlets that will use the money to buy printing presses and broadcasting equipment.

The group hopes to raise up to SFr20m (€12.8m, $16.1m, £8.8m).

Sasa Vucinic, managing director at MDLF, said: "The listing of a financialproduct that mobilises private investment to support a free press is a truly revolutionary step, not just for media development but for all social causes. It could provide a blueprint for engaging private finance in social projects around the world."

While the offering is relatively small by bond market standards, it comes at a time when innovative financing techniques are increasingly being enlisted to address social, humanitarian and political issues. Microfinance, the business of making tiny loans to individuals in developing countries, is increasingly turning to the international capital markets for funding.

Meanwhile, six developed nations are planning to issue bonds, backed by future aid money, to fund immunisation programmes.

Roger Studer, head of financial markets at Vontobel, said: "More and more investors are asking for such products because it provides another optionin addition to regular donations they might make to such causes."

Vontobel and the Swiss Agency for Development and Co-operation will ensure secondary trading of the new instrument and investors can resell the bond before maturity if necessary.

"Investors end with a slightly lower yield than a normal bond but there are also social returns," said Mr Studer. Klaus Tischhauser, managing director at responsAbility, said the market for such products was growing.

MDLF was started in 1996 with seed money provided by George Soros, the billionaire financier who has sought to promote open societies in the former Communist bloc and elsewhere. It is active in 13 countries, predominantly in the former Yugoslavia and Russia, but its activities are increasing in Africa and Latin America in particular.


From the press release describing the security:

To mark World Press Freedom Day, 3 May 2006, it was announced that a social cause will be listed directly on a major stock exchange for the very first time.

Media Development Loan Fund, a New York non-profit organization providing low-cost financing to independent news media in emerging democracies, has teamed up with Swiss bank Vontobel Group and Zurich-based social investment specialists responsAbility to launch a listed product to support the development of the independent press in developing countries.

"Voncert responsAbility Media Development", which is issued today, will be listed on the Zurich stock exchange. It combines an interest rate market element and an investment in MDLF, providing investors with a financial return as well as a social return. Secondary trading is ensured by Bank Vontobel AG and the Swiss Agency for Development and Cooperation (SDC) as part of an innovative partnership.

"The listing of a financial product that mobilises private investment to support a free press is a truly revolutionary step ? not just for media development but for all social causes," said Sasa Vucinic, Media Development Loan Fund Managing Director. "It could provide a blueprint for engaging private finance in social projects around the world. Vontobel, responsAbility and the Swiss financial community deserve great credit fortheir vision."

The central element of the Voncert responsAbility Media Development is a loan at 1% to MDLF. Vontobel merged this loan into a structured interest product (VT Swap Note Open End CHF, five years). The resulting product corresponds to a bond investment with a social component. In collaboration with SDC, Bank Vontobel AG ensures that the investment in MDLF is tradable at all times and that investors can resell the product before maturity if necessary. This allows investors to invest in independent media at moderate risk via a conventional investment form.

MDLF financing enables leading journalists to play a key role in developing democratic societies by helping them build self-sustaining news businesses. Loans are typically used to buy printing presses, new TV and radiotransmitters and broadcasting equipment, helping independent news outlets reach more people, generate more revenue and stay clear of government monopolies. MDLF financing is often the only way an independent media company can access the capital it needs to strengthen and grow while staying free from state control or vested interests.

Funds raised will be allocated to a revolving loan pool that recycles repayments, enabling them to be used over and over to support independent news media around the world. MDLF supports each loan with intensivefinancial monitoring, management training and technology assistance. In its 10-year history, MDLF has provided almost $50 million in affordable financing to more than 50 media companies in 17 countries, with loan losses of only 3.1 percent. It has a current portfolio of approximately US$30 million.

"The needs are immense," said Mr. Vucinic. "More than 80 percent of people live in countries without a free press. In other words, more than 5 billion people can't trust what they read in the newspaper, hear on the radio or see on TV, and do not really know what is happening in their own country."

The Voncert responsAbility Media Development follows the launch in December 2005 by MDLF of Free Press Investment Notes, the world's first investment product to support independent media in emerging democracies. Individuals and corporations in more than 20 U.S. states and the District of Columbia can buy Free Press Investment Notes, which enable buyers to invest for a specific term ? of between 1 and 10 years ? and receive agreed financial returns, ranging from 1 percent to 3 percent.

Media Development Loan Fund

MDLF, founded in 1995, pioneered a new model of media support, focused ondeveloping self-sustainable independent media outlets. From 1996 to March2006, through its loan and investment program, MDLF has:

· financed over 120 projects, for 53 independent media companies, in 17countries· provided $48.5 million in low-cost financing

· collected $17.9 million in principal repayments

· collected $4.25 million in interest and dividends

· written off as losses only 3.1% of the total loaned and invested

· ended March 2006 with a $29.1 million portfolio of loans andinvestments

Vontobel Group

Founded in 1924, the Vontobel Group is an internationally-oriented Swiss private bank and is headquartered in Zurich. Vontobel specializes in asset management for sophisticated private and institutional clients, as well aspartners. It serves its clients via three business units: Private Banking, Investment Banking and Asset Management & Investment Funds. Vontobel Group is a leading player in derivative and structured products in Switzerland and has a proven history in packaging clients needs in investable securities. As at December 31, 2005, the Group reported CHF 57.6 bn of client assets and managed CHF 31.3 bn of custody assets. It employs 917 staff worldwide. Vontobel's registered shares (VONN) are listed in Switzerland on the SWX Swiss Exchange. The Vontobel family and the Vontobel Foundation hold the majority of shares and votes in the company.


responsAbility is a Zurich-based social investment services provider specializing in developing countries. The outcome of a private initiative begun in 2003, responsAbility is backed by its founding institutions and/orshareholders, including representatives of the Swiss financial market (Baumann & Cie., Credit Suisse, the Raiffeisen Group, Swiss Re and the Vontobel Group) in addition to Andromeda Fund and George Avenue, social venture capital funds.

Inquiries to:

United States: Harlan M. Mandel, MDLF Deputy Managing Director. Phone: (1)917 294 5444, (212) 807 1304. Email

Europe: Peter Whitehead, MDLF Director of Communications. Phone: (44)(0)7763 175 332. Email 37 West 20th Street, Suite 801, New York, NY 10011 Phone: (212) 8071304 Fax: (212) 807 0540

Czech Republic Na vinicnich horach 24, 160 00 Prague 6 Phone: (4202) 2431 28 32 Fax: (4202) 24 31 54 19e-mail:

[The above described notes are available only in Switzerland. US investors in many US states wanting to support MDLF's work can instead invest in MDLF's Free Press Investment Notes, issued with the assistance of the socially responsible investor group, the Calvert Fund - go to for more information.]