Aboriginals Plan First Tribal Tax-Backed Sale: Canada Credit

Canadian aboriginals are preparing what they call the first-ever sale of tribal debt backed by taxes and other revenue, earning an investment grade rating by pooling together the funding needs of dozens of communities.

The First Nations Finance Authority will probably sell C$100 million ($96 million) to C$150 million of 10-year bonds in February to institutional investors, said President and Chief Executive Officer Ernie Daniels. The authority’s plan for a sale on behalf of 26 to 30 communities received an A3 rating from Moody’s Investors Service on Nov. 13. A second credit rating is due in the next few weeks, he said, declining to name which company would publish it.

The debt sale would come almost a decade after Canada passed legislation authorizing such a program, and may offer more autonomy to communities that often struggle with high unemployment and worn down housing and water systems. 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 authority’s website.

“It allows First Nations to access the same levels of financing that other levels of government currently have,” Daniels said by telephone from his office in Westbank, British Columbia. “It is such a great day, the historical significance of this, it is huge.”

Casino Bonds

The First Nation’s plans differ from U.S. Indian tribes who have sold debt backed by casino revenue because the authority’s revenue stream is more diverse, said Jennifer Wong, assistant vice president of Moody’s Canada. The group won an investment-grade rating in part because the agency withholds 5 percent of the money raised and puts it into a reserve fund which provides a buffer for the bondholders, she said.

“It is one of the first, if not the first central borrowing agency for First Nations, from where it has a pool of borrowers that are First Nations,” said Wong. “It’s a very new organization with currently a small pool of borrowers, but we anticipate that as they establish themselves, they’ll grow their pool and diversify their pool as well.”

The Moody’s A3 rating is four levels below the ratings of Ontario, Canada’s largest provincial economy, at Aa2. Prince Edward Island, the smallest province by population, has the same rating as Ontario.

AT&T Debt

Elsewhere in credit markets, the extra yield investors demanded to own provincial debt compared to federal benchmarks widened 2 basis points to 73 yesterday, according to the Bank of America Merrill Lynch Canadian Provincial & Municipal Index. Yields fell to 3.02 percent from 3.04 percent.

The spread on investment-grade corporations over government debt widened 2 points to 122 yesterday, according to the Bank of America Canada Corporate Index. Yields fell to 3.14 percent from 3.15 percent.

Canada Housing Trust, the financing arm of Canada’s mortgage agency, yesterday sold C$2 billion of bonds due in September 2023 at a yield that was 49 basis points greater than federal government debt.

Canada yesterday started a C$3.3 billion sale of 1.25 percent coupon bonds due in February 2016.

AT&T Inc., the largest U.S. phone company, began selling C$1 billion of 3.825 percent coupon bonds due November 2020.

Yield Comparisons

First Nations Finance is seeking a yield on the bond sale that would be “close” to what some provincial governments pay, Daniels said. Yields on Ontario 10-year bonds today were unchanged at 3.43 percent.

Membership in the First Nations Finance Authority is open to any aboriginal government provided they meet the terms of the 2005 First Nations Fiscal and Statistical Management Act, which provides oversight for borrowing.

The first bond sale was delayed by work needed to create the authority and certify interested tribes, Daniels said. There will probably be a second debt sale after the February debut with at least 10 communities participating, he said.

“It allows them to develop economically that much faster and with confidence,” he said.

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