First Nations bond deal offers financing model for resource projects

An unprecedented foray into the bond market by two small First Nations communities in northern Alberta may provide a template for future business partnerships involving Indigenous Canadians.

It took three years to engineer a deal that turned Fort McKay and Mikisew Cree First Nations into owners of a 49-per-cent stake in a Suncor Energy Inc. storage facility near the country’s oilsands region in Fort McMurray. The bond market was a crucial part of the solution, with investors buying $545 million of 4.136-per-cent bonds due in 2041 last month. It was the largest debt sale for an Indigenous group in Canada.

A lack of cash has often prevented First Nations from taking equity stakes in projects as opposed to signing a traditional impact and benefit agreement that outlines how they will be affected and share in production. Mistrust between the peoples who have inhabited the country for thousands of years and the newcomers who have developed businesses is another hurdle.

“We really started with a blank sheet, working with Suncor and the First Nations on how to develop the governance documents and the financing approach that was going to be a win-win for everybody,” said Mark Saar, Calgary-based North American head of project finance at RBC Capital Markets, which structured and marketed the deal. “What made it successful at the end, in all the negotiations we had, is the implicit trust between the parties.”

The sale of the bond, rated Baa1 by Moody’s Investors Service and BBB (high) by DBRS, was preceded by a fixed-income road show, which for some investors was the first time they did business with Indigenous people, said Jim Boucher, chief of Fort McKay First Nation, a group with over 800 members that has become the owner of a 34-per-cent stake in the tank farm.

“It was very enlightening for them to be sitting across a First Nations group who were directly involved in a bond issue,” said Boucher. “Some of the people were quite impressed.”

Mikisew Cree First Nation, with a population of 2,618 according to data from 2013, bought a 15-per-cent stake in the tank farm.

“I don’t think there’s one proposed megaproject in Canada that is not contemplating, or has not been contemplating in some way, how to get First Nations alignment of interest in the project via an equity stake,” RBC’s Saar said.

First Nations Finance Authority, an organization set up in 2005 and governed solely by the First Nations communities, is another example of Indigenous peoples’ activity in the bond market. It most recently sold $126 million of 3.05-per-cent securities due in June 2028 in October. That was the authority’s second bond sale after an inaugural 3.4-per-cent 10-year bond sold in June 2014.

With the proceeds from the sale of the bonds, the First Nations get a slice of a Suncor-operated tank farm, a storage, blending and cooling facility that takes bitumen production from the Fort Hills oilsands mining project near Fort McMurray. It’s a utility-like asset, perfect for creating a set-and-forget structure that serves both owners and bond investors. It provides a steady long-term cash flow that can be broken down into debt servicing and an equity dividend for the owners.

There were about 20 buyers of the bonds and a range of investors, including asset managers, pension funds, insurance companies and governments, according to Rich van Nest, head of debt syndication at RBC in Toronto. Some of the bonds were sold outside of Canada as well, he said, without providing more detail.

That positive reception shows there’s potential for more deals involving First Nations, said Fort McKay’s Boucher.

“We’re really excited about the response from the bond market,” Boucher said. “I hope we can use this as a springboard not only for resource development projects, but other economic opportunities in the Canadian economy, whether it’s manufacturing or even clean energy.”