Dear Bob, Have you been involved with church bonds? I have inherited a bond that has gone into default. The trustee petitioned the court to allow a restructuring of the loan by transferring the debt to a third party. It seems that the bondholders will not receive the value owed on the bonds. Over a period of 15 to 30 years, the bondholders will receive some amount of their bond and interest but not all. The trustee says this will be better than a foreclosure on the original debt. Is this a common practice? Seems to me the trustee gets all of his cost and the bondholders do not.
This is a common practice for more debt markets than just church bonds. In fact, you can see something similar happening in Greece or another good example “will” be the State of Illinois. The bottom line is that the country, church, organization, etc. cannot pay the loan back. At this point, one of two things could occur. The organization, church, country, etc. could default and no one gets anything.
The entity could also go to the bondholders and restructure the debt. That is a fancy way of saying – you may not be getting what you hoped would come to you; however, something is better than nothing. Welcome to the Post Financial Crisis Environment of Debt!
So, what about church bonds? A church will issue a bond and borrow money from its congregation or other investors and agree to pay back the money with a fixed interest payment over a period of time and then return the principal at the end of the investment period. It works really like any other bond.
Church bond financing has been a wonderful tool for churches to build their ministries. There has always been a risk that goes along with church bonds. A Pastor and lay leader group of the church might feel that this is where the Lord wants the church to go and that bond financing is the route to take. But by being overly convicted about what they feel is the Lord’s direction, they might get careless with the structure of the debt, or might end up putting together a deal that is destined to fail.
I have always believed that you move with faith. I also believe that along with faith and direction, God also asks us to use common sense and conduct extensive due diligence on every available option and take a great amount of care and time in the process. Many times, that due diligence process is not conducted as it should. Worst case scenario – you have a church that is practicing horrible stewardship and the whole process is doomed from the start.
The bottom line is that it can be a great method for church financing. In this environment, you just have to be especially careful. Remember that oftentimes a church will go into a bond deal because they cannot get traditional financing. Don’t just trust! Do the due diligence! Church and business don’t always mix well!!