Cold War Bomber Hub Gets a Makeover in Arctic Bond Debut

Canada’s northernmost territory, Nunavut, is borrowing in the bond market for the first time to revamp the capital’s airport as the Arctic region seeks to strengthen ties with the outside world and spur development.

The C$140.8 million ($134.1 million) bond through a public-private-partnership will help build an infrastructure link to resource markets since the capital, Iqaluit, lacks roads connecting it to northern communities. In addition to air service, the mostly indigenous Inuit residents depend on barges that float in goods at high tide from ships lying a mile or two out at sea.

Nunavut straddles the Arctic Circle, north of which is roughly one fifth of the world’s recoverable oil and gas reserves, according to the U.S. Geological survey, and is home to gold, diamond, iron and uranium deposits. While accounting for about 20 percent of Canada’s land mass, the territory is one of the world’s most thinly populated regions with 34,000 residents. Prime Minister Stephen Harper, who toured the more than 2 million kilometer (1.24 million mile) region last week, is pushing economic development in mining to help address the region’s chronic unemployment.

“The infrastructure needs to be developed so more and more of these bonds are coming,” John Johnston, chief strategist at investment-management firm Davis Rea Ltd., said by phone from Toronto. “If you’re looking at a 30-year horizon, the north is going to get more and more developed. Over the long run they’ll get their mineral wealth out.”

P3 Bonds

The bond sale for Arctic Infrastructure Limited Partners will finance the overhaul of the territory’s main airport in Iqaluit until the debt matures in June 2047, according to Standard & Poor’s, which rated it last week. CIBC World Markets Inc., manager of the sale, is meeting with investors in coming weeks and may sell the bonds next month, according to a person with direct knowledge of the transaction who wasn’t authorized to speak on the record because the terms aren’t public.

Under the P3 partnership, the bond will provide about half of the funding to revamp the airport, according to S&P, which rated the bonds A-, the seventh-highest on a scale of 12. The government will make payments to partially cover the cost of building the airport; later it will make monthly payments to pay bondholders over a 30-year operating period.

“They’re using the bond market and the public-to-private partnership structure to upgrade the airport,” Mario Angastiniotis, an analyst at S&P, said by phone from Toronto. “It provides a great risk allocation where the risk of the project is passed down to the private sector with the government keeping at it arm’s length.”

Yield Spreads

Elsewhere in credit markets, Canada’s benchmark 10-year government bonds rose, pushing yields down three basis points, or 0.03 percentage point, to 2.66 percent. The price of the 1.5 percent securities maturing in June 2023 gained 21 cents to C$90.06 at 1:28 p.m. in Toronto.

The extra yield investors demand to own the debt of Canadian investment-grade corporations rather than the federal government ended last week unchanged at 121 basis points, according to the Bank of America Merrill Lynch Canada Corporate Index. Yields fell to 3.29 percent Aug. 23, from 3.32 percent the week before.

Spreads on provincial bonds were also unchanged on the week at 73 basis points, according to Bank of America’s Canadian Provincial & Municipal Index. Yields dropped to 3.13 percent on Aug. 23 from 3.16 the week before.

Federal-government bonds have lost 3 percent this year, Bank of America Merrill Lynch index data show. Provincial securities have dropped 4 percent, and corporate bonds have declined 0.7 percent.

Moving Risk

Bouygues Building Canada Inc., Sintra Inc., Winnipeg Airports Authority Inc. and Infrared Capital Partners Ltd. have been chosen by the government as the consortium to design, build and operate and maintain the airport for 34 years.

Opting for a public-private partnership “moves risk to where it should belong, with the private sector partner, and allows us to operate the airport once the infrastructure is in place for 30 years relatively risk-free from a government perspective,” Chris D’Arcy, Nunavut’s deputy minister of finance, said in a Aug. 23 interview.

The public-private model is one that the government may explore to address the territory’s other urgent infrastructural needs, such as a deepwater port or more housing, he said.

“It’s a model we would investigate given our limits on borrowing,” said D’Arcy. “There’s no end of need with respect to increased infrastructure in Nunavut.”

Record Runway

Public-private partnerships, or P3 deals, are increasingly being used to fund new hospitals, schools and roads in Canada with private companies taking on the role of equity sponsors and overseeing construction.

Iqaluit’s airport, with its main building encased in a bright yellow shell, needs an overhaul. It was established during the second World War and its runway, one of the longest in North America, once accommodated U.S. Air Force bombers that patrolled the Arctic as part of the American’s network of DEW (Distant-Early-Warning) stations during the Cold War.

Now it’s the main supply line to the north for everything from perishable food from Southern Canada to mining camps in even more remote communities above the Arctic circle.

With the retreat of Arctic sea ice, new shipping routes to Asia are opening up through the historic Northwest Passage, and via Hudson Bay and Greenland to Russia.

Borrowing Limit

Nunavut’s maiden bond issue comes as the jurisdiction, carved out of the Eastern Arctic as Canada’s newest territory in 1999, seeks more control of its natural resources and finances in a process known as devolution.

The federal government limits the amount of debt Nunavut can assume, according to Moody’s Investors Service, which rates the territory at Aa1. The limit is currently set at C$400 million, equivalent to 22.7 percent of Nunavut’s 2011-12 revenues.

Planned mining projects by companies including ArcelorMittal have been either shelved or scaled back as prices for iron ore and gold slump. Nunavut Premier Eva Aariak is demanding Harper accelerate the pace of talks on devolution, to return more mining royalties to the people of the territory.

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