Aboriginal bonds promise bright future
First Nations’ access to capital may spur resource partnerships
TORONTO — When Deanna Hamilton returned to her British Columbia aboriginal reserve after taking early retirement, she found herself revisiting a mystery she had encountered as a child.
Unlike her reserve, the city of Kelowna across the lake didn’t suffer from foultasting drinking water, unlit streets or sewage-saturated lawns that discouraged children from playing outside.
In short order, Hamilton discovered an explanation in one of capitalism’s most basic tenets: Kelowna could finance its superior infrastructure by raising money in the debt markets — an option not open to her Westbank First Nation reserve.
From there, it was simply a matter of gaining acceptance for an aboriginal bond — a process that tested her perseverance through 22 years.
On Thursday, Hamilton, 71, was to finally see the First Nations Finance Authority, which she helped create, issue Canada’s first bonds backed by aboriginal governments.
The $90 million worth of 10-year notes were expected to be sold Thursday, led by National Bank of Canada, according to a person with direct knowledge of the transaction, who asked not to be identified because discussions were continuing.
The issue would represent a major breakthrough for aboriginal groups by holding out the promise of both quality-of-life infrastructure improvements and native investment in major resource projects.
The timing couldn’t be more propitious after the government approved Enbridge’s Northern Gateway pipeline to ship Alberta oilsands production to the West Coast over the objections of local First Nations.
Both aboriginal leaders and Prime Minister Stephen Harper’s government have said the bond market offers a way native groups can get the capital they need to become partners in — rather than opponents of — resource development.
The Canadian government has estimated there will be $650 billion worth of natural- resource developments in the next decade. Many could hang on aboriginal participation.
“What we need to bring to the table now is the ability for First Nations to access the kind of capital that’s going to be required to have meaningful participation in these projects,” said Harold Calla, executive chairman of the First Nations Financial Management Board, one of the institutions that was created to facilitate Canadian aboriginals’ entry to the bond market.
“We’re talking projects now that are in the billions, the multibillions of dollars.”
Hamilton’s odyssey began in 1991 when she returned to the reserve after 28 years away, during which she worked in both the private and public sectors and in real estate development. At Westbank, she was quickly reminded of disparities that had first troubled her during childhood Christmas and Easter excursions across the lake.
While Kelowna, then a city of 76,000, could float a bond to upgrade its water-treatment plant or build a sewage system through a municipal borrowing pool, the Westbank reserve, 1/28th its size and with a different legal and cultural standing, was forced to live off its meagre current revenue.
“You cannot do proper economic development and encourage investors to come to your land if you don’t have sewers, water, roads,” she said by phone from Westbank, where she still lives.
“Honestly, I didn’t think it was going to take 20 years.”
“It demonstrates a maturity that has existed for a long time.” FORMER PRIME MINISTER PAUL MARTIN
Distressed by the differences between Westbank and Kelowna, Hamilton volunteered to set up her band’s property tax system, thinking that was where the answer lay. She soon recognized it would take years of revenue accumulation before the band could afford new sewers or street lights. That led to another trip across the lake, where Hamilton concluded the real answer lay in tapping large pools of capital through the bond market.
The obstacles were considerable. For one thing, aboriginal reserves weren’t allowed to sell bonds under Canadian law. Hamilton spent years trying to change that.
But even after a new federal law came into effect in 2006, she learned First Nations weren’t a natural fit for bondholders.
One problem was scale. The bond market acts like a wholesaler for debt: cheaper rates only come if you sell in bulk. The vast majority of aboriginal communities are far too small to qualify.
Lack of precedent posed another challenge: No First Nation had ever borrowed large sums before. And even if investors could be tempted, how would the bonds be secured? Many First Nations had the most rudimentary governing systems and their property tended to be communal, making it impossible to seize in the event of a default.
Hamilton and the First Nations Finance Authority would somehow need to persuade investors they’d get their money back.
The financing authority’s solution to the issue of size was to pool the borrowing of multiple bands into a single bond. To ease worries about a small community defaulting, it pioneered a series of safeguards for the bonds. It established a pair of reserve funds to cushion investors from some losses, demanded that bands commit the revenue needed for interest payments in advance, and put each community through a rigorous screening process before allowing them into the borrowing pool in the first place.
These and other protections earned the inaugural First Nations bonds an A3 rating from Moody’s Investors Service — higher, for instance, than the credit ratings for pipeline companies Enbridge and TransCanada. Because the finance authority was created under the auspices of federal law, the Moody’s rating also assumes some level of support from the Canadian government for the issue.
Even so, at $90 million, the bonds would be small by market standards, raising liquidity concerns among investors.
The interest rate being discussed for the bonds would be about 37 basis points, or 0.37 percentage point, more than Ontario’s current market borrowing costs, putting the relative yield at about 3.45 per cent for a 10-year note, according to the person with direct knowledge of the deal.
Former prime minister Paul Martin has devoted himself to aboriginal causes since leaving public life. He says the financing authority’s bond, which follows on the heels of the first bond sold by a wholly First Nations-owned corporation late last year, is a signal to the rest of Canada that aboriginals are becoming players in all levels of the economy.
“It’s important because it demonstrates a maturity that has existed for a long time, but that Canadians I don’t think have recognized,” Martin said in an interview.
Aboriginal access to the bond market has taken on a new urgency for the Harper government in the midst of the standoff with B.C. aboriginals over Northern Gateway. After the government announced it had approved the project on June 17, British Columbia native leaders said in a statement they “overwhelmingly oppose” the decision and “will pursue all lawful means to ensure it does not get built.”
The federal government explored the idea of loan guarantees for First Nations, essentially lending Canada’s AAA credit rating to a band, as part of a “First Nation outreach strategy” to make it more feasible for them to take equity stakes in resource projects, according to documents obtained by Bloomberg in February.