Wednesday, August 27, 2014
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Aboriginals Seek AAA Backstop Amid Pipeline Push: Canada Credit

By Andrew Mayeda and Ari Altstedter

bloomberg.com

Canada is considering loan guarantees for aboriginals that would make it more feasible for them to take equity stakes in resource projects, documents show.

“There is merit to the concept of aboriginal equity ownership in major resource opportunities, and the use of government loan guarantees is a feasible option to promote these arrangements,” said a briefing note prepared by officials at the Aboriginal Affairs ministry before a Sept. 23 meeting with the First Nations Financial Management Board.

The plan is part of a broader push by Canada to bolster support for energy infrastructure such as Enbridge Inc. (ENB)’s Northern Gateway pipeline. Bonds issued by aboriginal groups and backed by Canada may be attractive to investors because they would carry the security of a AAA rating while offering a higher yield than typical government debt.

The proposed debt would entice buyers if the Canadian government provides “explicit support” and there’s a “meaningful” spread over other securities, Jonathan Lemco, senior sovereign-debt analyst at Vanguard Group Inc., the biggest U.S. mutual fund company, said in a Feb. 12 telephone interview from Valley Forge, Pennsylvania.

First Nations

When Newfoundland and Labrador’s power authority sold C$5 billion in bonds last year with a federal guarantee those notes yielded 50 to 55 basis points more than Government of Canada bonds.

Aboriginals, also known as First Nations, lived in the territory that became Canada centuries before contact with Europeans began around 1500. The country is now home to about 1.4 million aboriginals, accounting for 4.3 percent of the population, Statistics Canada reported in 2011.

The government created the First Nations Financial Management Board in 2005 to support economic development in aboriginal communities. At the same time, it formed the First Nations Finance Authority, a non-profit agency that lends to aboriginals.

The board would provide “financial certification” to aboriginal groups interested in raising debt to buy equity in a resource project, according to a Sept. 18 letter to the government by the board’s executive chairman, Harold Calla.

The finance authority would issue the debt, which would carry Canada’s top credit rating and yield about 4 percent, he said.

Calla said yesterday in a phone interview he met Sept. 23 in Vancouver with deputy ministers from several departments, including natural-resources, transport and aboriginal-affairs.

“We’ve received good support from the minister and the government, but they do need to be in a position where they protect the taxpayers’ purse,” he said.

Living Standards

“This supports Canada’s long-term goals and objectives,” Calla said. “Equity participation would provide resources into First Nations communities to allow them to be more self-sustaining and therefore reduce the demand for government transfers.”

The median income of aboriginals between 25 and 54 years-old was about C$22,000 ($20,000), or a third less than non-aboriginals, Statistics Canada data from 2005 show. Prime Minister Stephen Harper is betting on resource development as a key to improving aboriginal living standards.

The consideration of loan guarantees was part of a “First Nations outreach strategy” by federal officials to shore up support in British Columbia for natural-resource development on aboriginal land.

Pipeline Opposition

Through discussions with tribal chiefs and other native leaders, officials sought to soothe concern about a range of projects in Canada’s westernmost province, including the C$6.5 billion Northern Gateway pipeline, Kinder Morgan Inc.’s proposed expansion of its TransMountain line, and a proposal involving Royal Dutch Shell Plc to export liquefied natural gas, according to 1,354 pages of documents obtained by Bloomberg News under Canada’s Access-to-Information Act.

The Aboriginal Affairs ministry didn’t respond to a request for comment on loan guarantees and the outreach strategy.

Aboriginal opposition to pipelines is clouding Canada’s plans to develop the oil sands, home to the world’s third largest crude reserves. Producers are counting on projects such as Northern Gateway and TransCanada Corp. (TRP)’s Keystone XL to ease a transportation bottleneck and raise the price of Canada’s heavy crude, which averaged $24.50 a barrel lower than the main U.S. benchmark last year.

Dozens of native aboriginal bands opposed Northern Gateway during 2012 hearings by a regulatory panel, and some have threatened to sue the government for failing to adequately consult. Canada’s Supreme Court ruled in 2004 that the government has a “duty to consult” aboriginals on resource projects that may affect their land.

‘Consistent Messaging’

The regulatory panel conditionally approved Northern Gateway in December, and Harper’s cabinet must decide this year whether to permit it.

Federal officials attending the September meetings were advised not to say anything that might hurt the government’s case in court, according to the documents obtained by Bloomberg. “It is critical that officials use consistent messaging across meetings to avoid creating confusion and mitigate risks” of future litigation, states one briefing note.

While expressing support for the idea, federal officials raised several concerns with the proposal, according to a briefing note prepared for the Sept. 23 meeting with Calla and the deputy ministers.

Cumulative Losses

By offering loan guarantees, the government may assume a “sizeable contingent liability” that could affect Canada’s “fiscal framework,” according to the note. It pointed to the case of the Nisichawayasihk Cree Nation, which had to cover 33 percent of the C$341 million in cumulative losses of a power-generating station in the province of Manitoba after taking an equity stake in the project.

Issuing debt through the First Nations Finance Authority would represent a “significant expansion” that would give it some of the powers of “mainstream commercial financial institutions,” the note said. “A very strong case will need to be put forth demonstrating why Canada’s well-developed private financial services industry cannot serve as the intermediary in these types of transactions.”

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