Special Purpose Vehicle (SPV) FAQ
Definitions
Debt Coverage Ratio – a financial metric used to determine how much revenue will be required to be pledged and flow to FNFA to meet the member’s debt obligations. It is calculated by comparing a borrowing member’s pledged revenues to its debt service payments. A higher ratio indicates a stronger capacity to repay debt.
Debt Reserve Fund – a fund established pursuant to the FNFMA through 5% withholding of each loan to support loan payments in the event of a member default; upon loan extinguishment, the principal held along with all related investment earnings are returned to the member. FNFA has never had a member default.
Loan Guarantee – a guarantee given that the debt will be repaid by the guarantor (the party providing the guarantee) should the borrower (SPV) be unable to repay the debt.
Qualified SPV – means a body corporate or limited partnership that is wholly owned, directly or indirectly, by one or more band(s) within the meaning of the Indian Act, First Nation(s) within the meaning of the Act, or Indigenous group(s) that is a party to a treaty, land claims agreement or self-government agreement with Canada.
Secured Revenues Trust Account – an account established for each borrowing member through which pledged revenues flow directly from the payor source; the trust company flows what is required to cover loan payments to FNFA and the remainder to the borrowing member. It ensures that loan repayment obligations are met on time by automatically directing the secured revenues to cover debt payments. It acts as a safeguard for the FNFA and helps maintain the financial integrity of the borrowing system under the FMA.
SPV – Special Purpose Vehicle: a limited partnership, body corporate or corporation created for investment into a project.
Purpose
A number of new scenarios are emerging for Indigenous groups to seek a loan from FNFA. Many Indigenous groups are now receiving revenues from economic development streams and investments, such as royalties from specific projects, as well as fixed income from long-term contracts. Additionally, Canada and several provinces have recently established, or announced the development of loan guarantee programs for Indigenous groups. Such guarantees could be used to support loans by FNFA to eligible Indigenous groups. There is an opportunity to expand this eligibility for FNFA financing that would improve the access to capital and participation in major projects by more Indigenous groups. Currently, only First Nations that are bands under the Indian Act are eligible to receive loans from FNFA. New regulations to the Act are in process to expand FNFA’s mandate to make loans to Indigenous groups that are party to a treaty or self-government agreement with Canada. Until those regulations are brought into force, such Indigenous groups and all other Indigenous groups that are not bands are ineligible for a loan from FNFA. A First Nation must also qualify for, and obtain, financial performance certification from the First Nations Financial Management Board to be eligible for a loan.
We are proposing to amend the Act to allow FNFA to lend to an Indigenous-owned Special Purpose Vehicle (SPV) – a limited partnership, body corporate or corporation established to invest in a specific project. This could be owned by one or more Indigenous groups. This could enable all Indigenous groups to participate in FNFA’s loan program, securing low-cost capital for their projects. This would also generate more own-source revenues opportunities to bolster economic growth and prosperity. These generated revenues could potentially be leveraged into financing put towards closing the ever-widening infrastructure gap.
Additionally, many economic opportunities are usually offered to a group of Nations or other Indigenous groups when a project passes through their territorial areas. Since these are project-based equity opportunities, there is usually an opt-in deadline date. The ability to participate in the opportunity as part of a group, whether or not a Nation is a current FNFA member, means full and complete participation. Allowing an SPV to access financing through FNFA, where rates are significantly lower than those offered by other financial institutions (i.e. banks or private lenders) increases the net financial outcome.
An SPVs is established to hold the equity shares of the participating Indigenous group. Since FNFA would not lend to individual Nations but to the SPV itself which would have the backing of a loan guarantee, the issuance of a Financial Performance Certificate by the FMB would not be necessary. The SPV could therefore apply for FNFA membership under a modified membership application process. Should any of the participating First Nations or Indigenous groups wish to pursue FNFA financing for their own community projects utilizing their individual community own source revenues, outside of the loan guarantee, then the steps required under the Act would be applied as they work towards FNFA borrowing membership for their community.
The purpose of the FMB certificate requirement is to minimize the risk to FNFA’s borrowing pool by applying standardized ratio tests to ensure all borrowing members have passed the same financial thresholds. By utilizing a loan guarantee for SPV financing opportunities, the risk is mitigated and provides comfort to investors that buy FNFA’s debenture issuances (bonds) as an alternative to the FMB certificate.
Also, the loan guarantee would allow FNFA to lend directly to the SPV and so all participating First Nations and Indigenous groups benefit from the equity opportunity – all participating groups would see the venture’s profits flow to their community to meet their priority needs.
Frequently Asked Questions around Special Purpose Vehicles
- A loan guarantee will be in the form of a contract between the SPV, FNFA, as
lender, and applicable government, as guarantor. - The terms of the loan guarantee will be negotiated between the SPV, FNFA and
the applicable loan guarantee body. - FNFA expects it could make a claim under a government guarantee as soon as a
default by the SPV occurs, or following, a short notice period. - A review of the published terms of the federal and provincial Indigenous loan
guarantee programs indicates only Ontario has a stated 90-day notice period
before a claim under a guarantee is paid. - FNFA would evaluate the terms of the guarantee the government is willing to
provide in considering whether to make a loan to a SPV (i.e. if the terms of the
guarantee improperly limit the ability of FNFA to rely on that guarantee, then
FNFA would not make a loan to the SPV).
- The eligibility criteria is purposefully intended to not be restrictive. Rather, if the SPV qualies for a guarantee under an Indigenous loan guarantee program, then the SPV should generally be eligible for a loan from FNFA.
- The eligibility criteria for a SPV in the draft legislative amendment was the following:
- A “qualifed SPV” means a body corporate, corporation or limited partnership that is wholly owned, directly or indirectly, by one or more band(s) within the meaning of the Indian Act, First Nation(s) within the meaning of the Act, or Indigenous group(s) that is a party to a treaty, land claims agreement, self-government agreement with Canada or with a province or otherwise has rights recognized and affirmed under section 35 of the Constitution Act, 1982.
- The Authority shall not make a loan to a borrowing member that is a qualied SPV unless repayment of the loan is guaranteed by His Majesty or a Crown corporation.
- The borrowing member and the Authority have established a secured revenues trust account that is managed by a third party approved by the Authority, and
- Subject to terms that require the third party managing the account to periodically pay to the Authority the amounts required to be paid to it under the borrowing agreement with the borrowing member, at the times set out in that agreement, before paying any remaining amount to the borrowing member; and
- The borrowing member has required the payers of the other revenues being used to secure the loan to deposit those other revenues into the secured revenues trust account or an intermediate account during the period of the loan.
- The fact that a SPV has received a government loan guarantee will not necessarily result in the SPV receiving a loan from FNFA. FNFA will undertake its own due diligence in determining whether to make a loan to a SPV.
No. Due to the structural differences of the SPV, the SPV would not be able to have a representative on the Board of Directors of FNFA. However, any Nations that are a part of the SPV and also a borrowing member of FNFA would be eligible.
No, there isn’t a predetermined number of First Nations that can collaborate in a SPV. The primary advantage of this initiative is the ability of FNFA to finance a single entity (the SPV) instead of multiple First Nation partners, improving financing efficiency and streamlining the process.
a) In order for an SPV to obtain a loan from FNFA supported by a loan guarantee, do all the participating First Nations or Indigenous groups owning an SPV need to: have a Financial Performance Certificate issued by the FNFMB?
b) have a Financial Administration Law issued by the FNFMB?
No – the structure of this initiative is to provide FNFA’s affordable access to capital to more Indigenous groups. Those that have not gone through the traditional process to access FNFA financing (via FMB certification) can access it through an SPV where a loan guarantee exists.
Yes, in a scenario where the SPV is participating in an equity partnership where there is a revenue guarantee, FNFA would consider financing. Revenue guarantees usually take the form of royalties or derived revenues (ie. hydro contracts) from the equity partnership.
The governance of the SPV will determine the terms and conditions of participation, including the wishes of any participant that wishes to leave the SPV. They would require the consent of all SPV members and need to determine who would take on their portion of the debt/equity.
No. There is no predetermined limits on the amount of financing that can be accessed through FNFA.
Yes, the expectation is that the SPV will participate in all risk mitigation activities, including contributions to any established security funds. As well, if the SPV has obtained a loan from FNFA, it will only be able to be a borrowing member with the consent of all other borrowing members.
Yes.