Housing Strength in Numbers Could Aid Native Bond Finance

Mortgage & Real Estate

Here’s a good idea from Canada on how to finance badly-needed housing for Native populations in this country.

Basically, more than twenty Canadian tribes (called First Nations) are banding together to support a bond financing that has already received an investment grade rating from Moody’s Investors Service and another agency.

Housing is one of the several uses contemplated by a few of the First Nations from loans they will get from a central financing arm on the bonds, confirmed Ernie Daniels, chief executive of the First Nations Finance Authority, British Columbia. He anticipates the issue coming in March.

Moody’s Investors Service has assigned an A3 rating for the financing. According to a report by Bloomberg, the offering will raise something in the area of C$100 million to C$150 million.

The big advantage to First Nations? At an anticipated interest rate below prime, the money will be cheaper to get than from bank loans.

Once the bonds are issued, the Finance Authority will lend the proceeds to those First Nations that have qualified for the program, which was set in motion by the First Nations Fiscal Management Act. The loans will be secured by a variety of existing revenues of the tribes.

Daniels said 34 First Nations have gone through a rigorous process to qualify for the program, and that 20-30 of them would receive loans from the bond proceeds.

Certainly there are enough American tribes (more than 500) to populate a similar consortium. But, there are several hurdles an American program would have to overcome.

One is that there isn’t a centralized Native finance agency, such as FNFA, which Daniels called “the first of its kind in the world.” Also, a key difference between First Nations and American Indian tribes is that American ones have sovereign immunity from suits. Canadian tribes do not, and that lack of a perceived barrier makes it easier to get a rating.

But, such a financing arm could be started. And tribes that want to be involved can designate a waiver of sovereign immunity, if they do so.

Another thing that helped earn the Moody’s rating was the strength of the income streams involved, Daniels said. “We will only lend against existing revenue streams, not future ones,” he said.

First Nations will use the loans for a wide variety of projects, Daniels said. These include housing, hydro projects, wind projects, equity purchases in investments, leasing buildings, and fishing ventures.

The Moody’s A3 rating represents a step up for Canadian tribes over American Indian casino bonds, which often sell as high-priced “junk” bonds due to the volatility of casino revenues.

In the Canadian issue, the strength of many tribes (up to 30 communities) is lessening risk in the bonds, as is the use of a variety of cash streams and a reserve fund to provide comfort to investors.

According to the FNFA, it has established a Debt-Reserve Fund to assist in the event that a First Nation cannot meet a loan payment. The DRF is funded by all the borrowing members and is enough to cover approximately one year of payments for each loan. In addition, the FNFA holds a $10 million Credit Enhancement Fund as a second line of defense if a community’s DRF should ever be exhausted.”

In addition to that, the First Nations Financial Management Board “holds intervention capabilities to assist a defaulting First Nation get back on track with debt service requirements.”

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