The Barclays Public Finance Capstone team examined the feasibility of a US municipal impact bond (MIB), which gives investors a variable yield depending on the outcome of the underlying project. Thus, the return for the investor is directly linked to the result of a project; the better the project's performance, the higher the yield for investors. Investors expect that the return should qualify as tax-exempt income.  The team conducted research, performed analytical work, and consulted potential issuers (municipalities) and investors. The Capstone team developed a scoring tool methodology that assesses if a particular bonds is suitable to be structured as a MIB. Furthermore, the team identified the main characteristics that MIBs should have in order to be viable and attractive financial instruments for issuers and investors.

Focusing on water, recycling and education projects, the Capstone team argued that a MIB structure would be appropriate in a context with the following characteristics:

  • a high-risk and large-scale and/or innovative project;
  • willingness of the municipality to pay a higher rate to investors if the project performs at or above the "success point" either from a stream of revenues generated by the project, fees associated with the project, or from its fiscal budget;
  • continuous or semi-continuous bond payment structure to attract investors;
  • commitment of the issuer to provide disclosure and relevant information such as a report from a third party that verifies the metrics and outcome performance; e) MIB's income is tax-exempt.