Aboriginal Bond Holds Promise of Breaking Resource Logjam
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 foul-tasting 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.
Today, the First Nations Finance Authority, which Hamilton helped create, issued Canada’s first bonds backed by aboriginal governments. The notes, with a rating higher than some top Canadian companies, will help 14 communities build infrastructure such as housing and sports facilities.
The C$90 million ($83 million) worth of 10-year notes 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 Inc. (ENB)’s Northern Gateway pipeline to ship Alberta oil-sands production to the Pacific coast over the objections of local bands, known as 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 C$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 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 meager current revenue.
“You cannot do proper economic development and encourage investors to come to your land if you don’t have sewers, water, roads,” Hamilton, 71, said in a telephone interview from Westbank, where she still lives. “Honestly, I didn’t think it was going to take 20 years.”
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.
Issue of Size
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 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 Corp. (TRP), and for Sun Life Financial Inc., Canada’s third-largest insurance company. 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.
Paul Martin, Canada’s prime minister from 2003 till 2006, 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. “You’re dealing with people who are far more sophisticated than I think Canadians understand.”
The bonds sold at an interest rate 37 basis points, or 0.37 percentage point, more than Ontario’s current market borrowing costs, according to Sunil Bhutani, head of government finance at National Bank of Canada, which managed the sale. At that yield, the interest rate on the bonds would be about 3.45 percent.
The 14 communities involved this time only represent 10 percent of all the bands now authorized to borrow, Ernie Daniels, the chief executive officer of the finance authority, said today by phone. They’re looking to fund alternative energy projects in Ontario and Quebec, oil and gas projects in the Prairies and much needed infrastructure right across the country, he said.
“You can now do your planning with a certainty funding is there,” Daniels said. “They know they can have access to the financing that other levels of government have to really do the things they’ve always wanted to do.”
Daniels said the finance authority plans to come to the market at least once a year from now on with at least C$100 million of bonds.
Aboriginal access to the bond market has taken on a new urgency for the Harper government in the midst of the standoff with British Columbia 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 News in February.
“There is merit to the concept of aboriginal equity ownership in major resource opportunities, and the use of government loan guarantees is a feasible option to promote these arrangements,” the Aboriginal Affairs department said in a briefing note prepared for a Sept. 23 meeting with the First Nations Financial Management Board.
For Hamilton, now a grandmother of five and two years into her second retirement, more help would be welcome from the government in accessing the bond market for economic development as well as resource projects nationally.
“There’s a lot of resource development going on across the country and communities see where they are on the sidelines waiting, when in fact they would perhaps be able to buy an equity portion,” she said.
In the long wait for the First Nations Finance Authority to make its bond market debut, Hamilton says her reserve has used its property tax system and other revenue sources to gradually invest in improving its water and sewage infrastructure among other improvements. That in turn attracted private investment, turning the once-sleepy reserve into a prosperous town where people from Kelowna now come to work and shop.
But other communities she’s visited over the course of her work are still grappling with the kinds of conditions Westbank faced in 1992. Mothers ask her to help them build sidewalks so their children won’t get hit by cars walking to and from school. With access to the bond market she hopes these communities will be able to move forward much faster than Westbank did.
“No government has ever built strength without having access to some way to fund,” Hamilton said. “I know that generations from now, First Nations will be thinking, this is just business.”
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