First Nations Selling Up to C$150 Million in Debt Through Bonds

Mark Fogarty
1/24/14

An innovative bond financing to benefit at least 20 Canadian First Nations has received a second investment-grade rating. And a second bond offering is now in the works.

Ernie Daniels, chief executive of the First Nations Finance Authority, said the British Columbia-based group would reveal the identity of the second ratings agency "in a few weeks" as the financing arm of all Canadian First Nations gears up to issue the bonds in March.

Previously, Moody's Investors Service assigned an A3 (investment grade) for the financing. According to a report by Bloomberg News, the offering will raise something in the area of C$100 million to C$150 million.

Once the bonds are issued, the Finance Authority will lend the proceeds to those First Nations that have qualified for the program, which was set in motion by the First Nations Fiscal Management Act. The loans will be secured by a variety of existing revenues of the tribe.

Daniels, a member of the Salt River First Nation in Canada's Northwest Territories, said tribes would benefit from the bond financings because the money, which he expects to raise at less-than-prime rates, will be cheaper than bank loans. He said 34 First Nations have gone through a rigorous process to qualify for the program, and that 20-30 of them would receive loans from the proceeds.

Daniels pointed out a key difference between First Nations and American tribes in that American ones have sovereign immunity from lawsuits. Canadian tribes do not, and that lack of a perceived barrier makes it easier to get a rating.

Another thing that helped earn the Moody's rating was the strength of the income streams involved, Daniels said. "We will only lend against existing revenue streams, not future ones," he said.

First Nations will use the loans for a wide variety of projects, Daniels said. These include housing, hydro projects, wind projects, equity purchases in investments, leasing buildings, and fishing ventures.

The financing has been in the works for several years, and Daniels said, "I'm really happy, and I can't wait for the day." The idea originated when some First Nations with reserves near municipalities started to advocate to raise money the same way municipalities do. "That's how it came about," he said.

Not only the financing is innovative, according to Daniels, but so is the authority itself. "It's the first of its kind in the world," he said.

The Moody's A3 rating represents a step up for Canadian tribes over American Indian casino bonds, which often sell as high-priced “junk” bonds due to the volatility of casino revenues.

In the Canadian issue, the strength of many tribes (up to 30 communities) is lessening risk in the bonds, as is the use of a variety of cash streams and a reserve fund to provide comfort to investors.

According to Bloomberg, “tribes can back the loans with revenue from sources such as local property tax, oil-and-gas project royalties and use the proceeds for infrastructure, housing and social and economic development.”

According to the FNFA, it has established a Debt-Reserve Fund to assist in the event that a First Nation cannot meet a loan payment. The DRF is funded by all the borrowing members and is enough to cover approximately one year of payments for each loan.  In addition, the FNFA holds a $10 million Credit Enhancement Fund as a second line of defense if a community’s DRF should ever be exhausted.”

In addition, the First Nations Financial Management Board “holds intervention capabilities to assist a defaulting First Nation get back on track with debt service requirements.”

Moody’s in its rating praised the “strong institutional framework and governance and management structure” of FNFA. It also noted the support of the Canadian government and the oversight board.

The agency’s rating could change in the future, however—and in either direction. “Material improvement in the credit quality, size and diversity of the loan pool along with an increase in liquidity could put upward pressure on the rating,” it said. “A deterioration of the size, diversity or credit quality of the loan portfolio and borrowing members and a reduction in reserves could put downward pressure on the rating. Indications of lower support from the federal government could also put downward pressure on the rating.”

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