First Nations Finance Authority
The First Nations Finance Authority (FNFA) is a voluntary not-for-profit organization focusing on providing low-rate long-term loans, in on economic ventures, social needs, infrastructure, land purchases, community-owned housing, and refinancing existing loans.
Hard to define by banks and financial authorities, First Nations continue to struggle when it comes to raising financing for infrastructure and land development.
FNFA came into the picture in order to address the difficulties faced by the First Nations, and help raising financing for the First Nations’ projects in the same manner in which the municipal governments raise financing for their projects – not through banks, but through the Capital Markets. The Canadian Business Journal spoke with Ernie Daniels, President and CEO of FNFA about the FNFA services and the financing situation faced by the First Nations.
“In regards to financing, when the First Nations use banks, they face an issue of banks not really knowing how to classify the First Nations. Therefore the banks define the First Nation more as a commercial loan rather than municipal authority. FNFA came into the picture to raise project financing for the First Nations on the same terms as municipal governments.”
With roots going all the way back to the Indian Act, the main financing issue for the First Nations is the fact that it is the First Nation that owns the reserve’s lands, but there is no one individual owner of this land. Furthermore, the federal government’s Aboriginal Affairs and Northern Development Canada holds these lands in trust. This means that the reserves need direct permission of the trustee – the government – for any business operation or development.
To remedy the issue, the federal government put into legislation the First Nations Fiscal and Statistical Management Act (FSMA) in 2005, establishing FNFA and several similar organizations to serve as the finance authorities to pool First Nations loan requests across Canada.
“The Indian Act represents a big barrier for business on reserves, so this legislation [First Nations Fiscal and Statistical Management Act] was set up to allow First Nations to operate on a similar playing field with other levels of government to develop their lands commercially and residentially without the need of the Minister’s approval,” explained Daniels. “Previously the First Nations had to work with banks to make structures to develop their lands and usually the First Nations received higher rate, short term loans. Consequently these loans put strain on cash flow for the First Nation. Today there is a number of legislations and regulations that address the impediments of the Indian Act.”
Modeled after Municipal Finance Authority of B.C., FNFA pools First Nations’ loans and sells them into the bond market. The First Nations who want to participate in the program need to be scheduled to opt into the legislation under the First Nations Fiscal and Statistical Management Act. This process has been set up to allow the First Nation a choice whether or not they want to take advantage of this Act, or use other avenues of the Indian Act to raise financing.
Once scheduled, the communities work with the First Nations Financial Management Board (FMB) that reviews their financial information, policies and procedures. If the review passes Standards developed by the FMB a certificate is issued, and this allows that community to apply for FNFA borrowing membership. FMB Standards were developed from the international COSO (The Committee of Sponsoring Organizations), assuring financial soundness of the First Nation. However, according to Daniels, this is just one of the safeguards FNFA put in place to assure that FNFA provides a sound, well-rated (credit) investment opportunity for buyers of FNFA’s bonds.
“While the process can be as long or as short as each community wants, it puts all the First Nations applying for FNFA borrowing membership on the same level playing field and this is great for the rating agencies and the banking syndicate, because they do not need to deal with each First Nation individually.”
Currently around 99 First Nations requested to be scheduled under the FSMA. The First Nations Financial Management Board currently works with 44 First Nations that are ready to go through the process, 15 First Nations have been awarded certificates, and 14 have become FNFA borrowing members.
FNFA does not require financial deposits or collateral from the borrowers, but the member First Nations need to have a secured revenue stream. FNFA intercepts the revenue streams supporting its loans, paying firstly the monies to the bondholders, and secondly the balance to the First Nation. “This wide revenue pool plus the intercept mechanism also provides strength when acquiring a credit rating. Our target is for the first bond to be near $100 million. We need to be over this target to attract the large institutional investors.”
FNFA groups its borrowing members’ financial information into a rating agency presentation. It is the strength of this information along with the bondholder safeguards built into the FSMA which determine the credit rating. This credit rating will help determine the loan rate for FNFA’s borrowing members. Currently, FNFA’s interim (i.e. short term) loan program’s rate is 2.50 per cent, or about 0.5 per cent below bank prime. A credit rating is needed to convert these interim loans into a debenture (i.e. bond).
FNFA aims to create a diversified pool of borrowing members of some 20 plus First Nations. Once FNFA builds its interim loan portfolio to sufficient size, it will issue a bond which will be sold to a banking syndicate. “Simply put, we are pooling the First Nations loan requests under very high standards and stringent financial processes to safeguard the investors,” summarized Daniels.
FNFA expects to offer its first bond in mid-2013. The credit rating agencies will need to issue a credit rating to the FNFA prior to this bond issuance. This rating will help determine the lending rate to FNFA’s borrowing members.
According to Daniels, most First Nations welcome business development on their lands as their population continue to grow. The First Nations realised that the economic development represents the best opportunity for growth, and FNFA can assist them in providing long term, low rate fixed financing for this development. “As the First Nations grow their economic development, they increase their own as well as FNFA’s borrowing capacity. Being able to raise financing in the capital markets is a great success for the First Nations as the capital markets are worth some $212 trillion globally, with excess of $1 trillion in the bond markets in Canada. First Nations never had access to these markets and FNFA is effectively changing this, while working for the economic development of the First Nations.”