FNFA Borrowing Process
FNFA receives loan requests from First Nations that are borrowing members. FNFA utilizes its credit facility through its banking syndicate to fund member requests as they are needed. Most loans start in the bridge financing program (floating rate loans that require interest only payments) and then transition into fixed rate debenture loans (that require both interest and principal payments) when FNFA issues its next debenture.
Following the FNFA Board’s authorization to proceed with a debenture issuance, FNFA will meet with its banking syndicate who will advise on the willingness of the capital market investors to lend. When the time is right, FNFA, through the banking syndicate will issue a debenture to be purchased by the investors.
FNFA’s debentures are purchased by institutional investors in Canada, the USA, and Europe.
Once the debenture issue has been sold through the syndicate to the investors, the proceeds will be used to repay the bridge financing loans or will be sent to the FNFA borrowing member. During the life of a debenture issue, the cash collected from FNFA’s borrowing members will be sufficient to cover FNFA’s liability to the investors.
FNFA’s policy is to relend on a sinking fund basis. A sinking fund is where the principal and interest payments each year by the borrowing member remain constant. The sinking fund consists of the principal portion of the loan payments collected from the borrowing members. These principal payments are not due to be paid to the investors until the end of the debenture (usually 10 years), and so these principal monies are invested. The earnings on these investments are credited to FNFA’s borrowing members, helping them repay their loans quicker. Interest payments collected from each borrowing member, however, are paid every six months to the debenture investors. Borrowing members will receive regular statements on each debenture issue in which they are participating so the accounting records are complete.
Debt Reserve Fund
In addition to the sinking fund, a Debt Reserve Fund (DRF) is established to assure enough funds are available to meet all principal, interest or sinking fund payments obligations. Each borrowing member requesting a loan will, as a condition of participating, contribute an amount equal to 5% of the total amount borrowed into the DRF. The DRF is a critical safeguard to FNFA achieving an investment-grade credit rating, which means lower interest rates for our borrowing members. This safeguard is the first line of defense against a missed or insufficient loan payment from a FNFA borrowing member. Once a borrowing member has made all its loan service payments in full and the loan is repaid, this 5% plus earnings are returned to each borrowing member.