A Bond Offering from the Navajo NationBy
The largest American Indian tribe, the Navajo Nation, plans to issue its first bonds in a $120 million offering that would be the biggest sale of nongaming tribal debt in at least a decade. The tribe intends to use the money to create thousands of jobs and stimulate the economy on its reservation in America’s Southwest. Despite the Navajo Nation’s energy revenue, more than 37 percent of the reservation’s 170,000 residents lived below the federal poverty level in 2009. “I am concerned with the time when we won’t have revenues from our natural resources,” said Katherine Benally, head of the Navajo Nation Council’s resources and development committee, while taking a break from a council budget session in Window Rock, Ariz. “We need to be ready for that.”
Gross revenue for the tribe was about $193 million in fiscal 2010, with $29 million from oil and gas and $61 million from coal royalties, according to budget documents. In May, Standard & Poor’s awarded the Navajo Nation an A rating—one level above California’s—citing its natural resource revenue and cash reserves of more than $1 billion. That money is held in a fund established in 1985 after the tribe won a court case over taxes from energy companies doing business on Navajo lands. Taxes, and leases on land and business sites, are the other major sources of revenue, according to S&P. Karl Jacob, senior director for state and local government at S&P in Boston, said his firm has only one other active municipal-bond rating for a tribal government. The Southern Utes of Colorado have a top AAA rating. “I don’t know that many tribes over the years have had the resources to garner an investment-grade rating on their own,” Jacob says. The Navajo Nation’s rating is an assessment of the tribe’s overall credit, and any specific bond issue could be rated differently based on the details of the deal, according to Douglas E. Goe, vice-chair of finance for Orrick Herrington & Sutcliffe, the tribe’s bond counsel in Portland, Ore.
In July, a special prosecutor hired by the tribe filed a civil lawsuit against 85 current and former Navajo officials alleging financial mismanagement. The suit, which is on hold after the tribe hired a new special prosecutor last month, accuses officials of funneling millions of dollars intended for the poor to family, friends, and political insiders. Jacob says S&P considered the impact of the lawsuit but decided that it would not change the tribe’s rating.
The proceeds of the bond offering will finance about 50 projects on the 27,000-square-mile reservation in Arizona, New Mexico, and Utah, according to the Navajo Nation Division of Economic Development. A tentative project list includes a dozen convenience stores, several fast-food restaurants, two shopping centers, office and industrial complexes that the tribe would lease out, a radio station, and a $14 million tourist center. Tribal estimates say the projects will generate $3.2 million annually in rental income and taxes, leading to the creation of more than 6,000 jobs.
The Navajo reservation stretches from the Grand Canyon through some of the most remote areas of the Southwest. Many residents live without electricity, running water, or paved roads. A trip to shop or see a movie often means traveling hours to towns outside the reservation. The projects would create more places where Navajos can spend money on Navajo lands. It’s about “keeping money on the reservation,” says Raymond Nopah, chief financial officer for the Economic Development Division. Gavin Clarkson, an associate professor at the University of Houston Law Center who studies tribal finance, says the projects “will be able to have a dramatic impact in an economically disadvantaged area.”
After oil was discovered on the reservation, the Navajo Nation’s tribal government was established in 1923 so the tribe could enter into leases with energy companies. The tribe had almost 274,000 members nationwide in 2005, the most recent year for which comparative numbers were available, says Nedra Darling, a spokeswoman for the U.S. Indian Affairs Office in Washington. The Cherokee Nation was second-largest, with about 258,000 members.
S&P’s Jacob says the Navajo offering is unusual because tribes traditionally have borrowed directly from banks or sold bonds backed by gaming revenue. There are $5.3 billion of Native American bonds outstanding, according to a Bloomberg analysis.
The Navajo bonds will be sold to institutional investors in a private placement as soon as yearend and will likely include both taxable and tax-exempt debt, says Goe, the bond counsel. The Navajos intend to seek investors willing to settle disputes in tribal courts, a first for a bond issue, Goe says. Clarkson says the requirement “would be a reaffirmation of the legitimacy of tribal courts—this time from the financial market.” Yet it may also make the issue harder to sell. Lyle Fitterer, who helps oversee $26 billion of municipal bonds at Wells Capital Management in Menomonee Falls, Wis., says the tribal-court stipulation “is one more hurdle in terms of investing in a deal like this” and could lead to the Navajos paying higher rates.
Mike Lettig, executive vice-president for Native American financial services and agriculture at Cleveland-based KeyBank, hopes the Navajo issue will be “a start for tribal governments to enter the public finance markets routinely.” KeyBank’s KeyBanc Capital Markets unit will handle the placement. “It is a way-overdue tool for the Native American community,” says Lettig, a Navajo descendant who isn’t an official member of the tribe. Clarkson says that for investors, the sale “will be a great demonstration of Indian Country as a domestic emerging market.”