Outside the Box: How Supplemental Capital Helped a Food Co-Op
In April 2010, NCUA board member Gigi Hyland released a white paper outlining the issues and opportunities inherent in nontraditional sources of capital. Hyland's paper, based, in part, on seven studies my organization released between 2001 and 2008, concludes, "Affording credit unions the ability to raise supplemental capital that counts toward PCA 'net worth' requirements is an appropriate policy consideration."
Our vast research on the topic makes the same conclusions based on policy analysis, field tests and examples of secondary-capital raising activities from credit unions located outside the U.S. and other types of cooperatives.
Yet, as reported widely by Credit Union Times and others, the possibility of advancing supplemental capital in today's political and economic environments may not be feasible. While the Filene Research Institute does not advocate one position or another in any policy studies, sometimes our research leaves little doubt about the appropriateness of certain proposals. To supplement the hard research, I thought I would share a personal experience I recently had with the concept of supplemental capital with another type of cooperative.
I am the board president at Williamson Street Grocery Cooperative in Madison, Wis. Willy Street Co-op, as it is affectionately known, has been around since 1974. We do $20 million in sales from a 9,500-square-foot retail store. Recently, we decided it was time to expand our retail footprint into a neighboring community. This expansion project will cost around $3.45 million, with funds coming from internal cash reserves, a credit union commercial loan and what we call "owner bonds." These bonds are what credit unions would refer to as subordinated debt. Our goal was to raise $600,000 in owner bonds in 60 days. We offered three varieties of zero-coupon bonds with three-, five- and seven-year maturities; interest rates ranged from 4.0% to 5.2%, and the bonds are sold in $200 increments. During a similar owner bond drive in 2001 for a store relocation, we raised approximately $450,000 from owners and paid back the capital with interest to every bondholder on time. After just 39 days of promoting this bond offering, Willy Street Co-Op sold $1 million in bonds, our board (and state government) authorized limit. The bondholders in past and current offerings do not have extra voting privileges as our voting structure remains one owner-one vote.
This experience is relevant for credit unions in a number of ways.
First, the issuance of uninsured debt financing is an appealing investment opportunity for cooperative owner-members. The expansion of a retail grocery cooperative is not what one would typically think of as an ironclad investment opportunity. Yet Willy Street Co-op quickly maxed out its bond offering. If positioned properly, credit unions, known as more conservative stewards of money, would likely be able to position similar, attractive capital instruments to members.
Second, we faced initial concerns that this supplementary capital would dilute the cooperative ownership structure. We are actually experiencing the opposite effect with Willy Street. Economic participation by cooperative owners is one of the tenets of the cooperative structure. We've heard from the hundreds of bond purchasing owners that the act of purchasing a bond actually gives them more of a feeling of ownership than when they simply shop the co-op.
Finally, Willy Street Co-Op's bond drive is a clear differentiator in a crowded marketplace. Like most communities, Madison has a lot of great grocers, and news of a new retail site is usually met with yawns. The fact that the individual owners of the co-op are putting up their personal savings as risk capital is causing the public to sit up and take note. Imagine the credit union corollary: U.S. credit unions, sometime in the future, could leverage similar drives for branch expansions, technology investments and other consumer friendly projects.
Retained earnings are the most traditional way to increase capital, but the argument for alternative capital is striking. Around the world and in other sectors of cooperatives, supplemental capital plays an extremely useful role in organizational health and growth. My experience with a small grocery cooperative in Wisconsin clearly indicates that supplementary cooperative capital is viable and useful.
Chief Research Officer
Filene Research Institute
Williamson Street Grocery Cooperative