Unique bond frees up dollars, give First Nations flexibility

Now that the Membertou First Nation is able to access money through the First Nations Finance Authority, it will be saving tens of thousands of dollars in bank charges.

“We have two large bank loans at regular banks at much higher rates and much shorter terms. With our borrowing capacity we’re able to borrow enough to pay off these bank loans. By doing that we’re able to save between $140,000 to $150,000 a month in carrying charges,” said Membertou Chief Terry Paul.

Membertou First Nation was using the money from the bank to cover the cost of infrastructure, as well as to further economic development. But bank rates are exorbitantly high for First Nations because the bank is unable to seize property on a reserve if the First Nation defaults on payment. As well, bank loans are for a short period of time. Paul says the longest term Membertou was able to get from a bank was seven years.

Now with funding raised through FNFA, rates are prime minus and debenture terms are up to 30 years.

Membertou is one of 14 First Nations which has been approved to access a $90-million bond secured by the First Nations Finance Authority. That amount of money equals the loans that have been approved for the participating First Nations.

That approval involved a stringent process which included a five-year examination of the First Nation’s governance structure and financial stability. As well, the First Nation had to have a revenue stream other than government dollars. Thirty-four First Nations, the majority located in British Columbia, have been approved as borrowing members. There are 124 more First Nations, that have expressed interest to begin working under the First Nations Fiscal Management Act.

Membertou First Nation has revenue from a variety of sources, including gaming, fisheries and commercial outlets, such as hotels, market, gas bar and an entertainment centre.

FNFA was created as one of three entities through the First Nations Fiscal Management Act. FNFA, considered in the government category, received a first-time issuer credit rating of A3 from the international rating agencies. Ernie Daniels, CEO and president of the FNFA, expects to achieve the highest rating of AAA within five years.

“We actually received an investor grade rating. It’s never been done with a group of First Nations together in a borrowing pool to borrow money. This is the first time ever in the world. Nothing like this exists,” said Daniels. “What this does, it enables us to go to the market and borrow money that’s on much better terms than the bank. It’s longer term financing at fixed rates.”

Fourteen investors, both Canadian and American, bought into the bond.

“When we launched … the bond was pre-sold. We had the investors lined up already. What that indicates is the interest out there in buying a bond from a totally first time issuer that is made up of First Nation governments,” said Daniels.

The interest is there, he adds, because the risk is less for investors due to of the rigorous process the First Nations had to undertake to qualify.

Daniels notes that each participating First Nation contributes five per cent to a debt reserve fund in case of a default in loan payment. As well, FNFA can appoint the Financial Management Board to work with a First Nation to resolve outstanding issues. Funding from the federal government is also available for that purpose.

Paul, who is also chair of FNFA, says the additional revenue stream for approved First Nations provides both security and independence.

“It’s tremendous.  It’s a game changer,” he said. “It’s like a Godsend… for any community across the country that becomes eligible to be a member.”

Federal government criteria require funding to be spent within a fiscal year and that isn’t always feasible, he adds.

“This is a way for First Nations to control their own futures, help build their communities really on their own time frame,” said Daniels. “They don’t need to go and get any authorizations from Indian Affairs to do anything. This enables them to access the money when they need it for what they need it as long as they have the revenues to support the loan.”

Both Paul and Daniels refer to this accomplishment as a “very historic moment.”

“It has been about 20-odd years in the making,” said Daniels, referring to when the First Nations Fiscal Management Act was adopted and FNFA along with First Nations Fiscal Management Board and First Nations Tax Commission created.

Paul singles out the hard work of Deanna Hamilton, of the Westbank First Nation, “who really came home to retire” and instead began to work on the debenture.

“There’s 20 years of work behind me,” he said. “I’m just very honoured, feel very, very fortunate I just happened to be chair.”

Now that the first debenture has been obtained, FNFA is not resting. Daniels says there is an interim financial program in place to allow other approved members to borrow while FNFA acquires secured funding.  He expects FNFA to issue $100 million bond in March 2015.