The Navajo Nation is quietly planning to access the capital markets for the first time in its history within the coming six months.
Having received its first-ever bond rating in mid-May, the Nation plans to issue debt to construct water and power lines and governmental buildings, according to Mark Grant, controller of the Navajo Nation since 2003.
The Nation has previously taken on debt through private loans. Last year it worked with Cleveland-based KeyBank for a $60 million loan to be used for building new judicial and correctional facilities on its reservation in Crownpoint, N.M., and Tuba City, Ariz.
KeyBanc Capital Markets, retained as the tribe’s underwriter to access the municipal market, then helped the Nation begin the rating process with Standard & Poor’s last November.
“We are looking forward to working with the Nation and the rest of the finance team in bringing the Nation’s first bond issue to market this year,” said KeyBanc managing director Geoff Urbina.
The push to go through the rating process and access the markets comes from a new administration that entered office in January. The administration consists of 24 members, reduced from 88 as a result of a voter initiative seeking efficiency.
“They are very interested in developing a lot of the infrastructure projects for the Nation,” Grant said. “They hit the ground running. We’ve been looking at this for the last 10 years so it’s something I’m looking forward to.”
Headquartered at Window Rock, Ariz., and covering 27,000 square miles, the Navajo Nation is the largest federally recognized Indian tribe by size of the reservation and by population, according to Standard & Poor’s.
The credit agency assigned the 285,000-member tribe a long-term issuer credit rating of A, with a stable outlook, on May 18. The general obligation credit is backed by the Nation’s full-faith pledge.
Primary credit analyst Lisa Schroeer said the rating reflects the Navajo Nation’s strong financial position, supported by solid reserves including a self-created endowment fund.
The government also benefits from revenue-generating natural resource assets and good management policies.
“It is our understanding that tribal law does not dictate any payments would be required to be senior to any debt service payments,” Schroeer wrote in the credit profile.
The permanent fund held $1 billion as of year-end 2010, and the government transfers 12% of revenue into the fund each year. The fund’s principal can’t be used for expenditure unless two-thirds of Navajo Nation Council members agree to it, and in the event of an imminent default its funds could be used to pay bondholders.
“The concept of a GO bond rating for tribes is relatively new,” said Standard & Poor’s analyst Karl Jacob. “There haven’t been requests coming our way for those types of ratings.”
If a tribal government wanted to access the capital markets in the past, they would either pay a bond insurer for a guarantee, which would substitute its rating for the underlying credit, or it would issue revenue-backed taxable bonds in the corporate market.
The Southern Ute of Colorado boast the highest-rated GO credit for an Indian tribe, with triple-A ratings from Standard & Poor’s and Fitch Ratings.
Like the Southern Ute, but unlike many other tribal nations, the Navajo do not rely on income from casinos or gaming as a major source of revenue.
Instead it benefits from diverse sources including proceeds from oil, coal and natural gas development. About 29% of 2010 general fund revenue came from natural resource production, a source Standard & Poor’s called “reliable” and which should endure for “at least the next 30 years.”
“We have an awful lot in the corporate realm that’s backed by gaming and lodging,” said Jacob, the credit analyst. “But this is GO criteria. There’s nothing in [the rating criteria] that says this is a tribal government.”
About 42% of tax revenue came from property rights, 30% was sales tax, 14% was business activity tax, 11% was oil and gas taxes, and the remainder came from fuel and tobacco taxes, according to 2009 data.
The Nation also increased its sales tax recently to 4% from 3%. The additional revenue was earmarked specifically for public safety facilities rather than the general fund, Grant said.
“In the neighboring areas outside the Navajo Nation, tax rates run anywhere from 7% on up, so the comparative rate is much lower than the adjacent jurisdictions,” said Marcelino Gomez, assistant attorney general in the tax and finance unit of the Navajo Nation’s Department of Justice.
Doug Goe, bond counsel at Orrick, Herrington & Sutcliffe, said it’s too early to say which specific projects the government would be issuing debt for or how much debt would be issued. But the executive and legislative branches are looking at what projects would be appropriate.
“It’s being worked on as we speak, but it will be a big range of projects,” Goe said.
Some of the debt could be issued as tribal economic development bonds under a trial-balloon borrowing program authorized by Congress in February. It allows the Nation to issue up to $30 million of tax-exempt debt for nonessential government purposes such as convention centers and golf courses. The program expires on Dec. 31.
Steve Erickson, owner of Utah-based financial adviser Steven Erickson & Associates, said the hope is to structure longer-term debt to match the life of the asset being financed. That’s not always easy given investor preference for shorter-term paper, but it’s those issues the Nation’s advisers will be working on in the coming months.
“As we go through the process and develop the list for the projects, it will help to provide guidance in the structure and term of the ultimate bond issue,” said John Frey, senior managing consultant at Public Financial Management.
Grant said Navajo officials are pleased with the A rating, but will strive to add more funds to the reserve and increase the rating to at least the double-A level.
Weaknesses cited by Standard & Poor’s include a reliance on the natural resources sector, and some uncertainty about revenue predictability.
The financial crisis also played a role in hurting its investment portfolio and reducing its pension funding to 68% in October 2008 from 86% in October 2007. The rating agency noted that the Nation has since made excess contributions to reduce the unfunded balance.
“Going through the rating process identified strengths and weaknesses,” said Gomez, the assistant attorney general. “It helped us learn a lot and we’re trying to improve the weaknesses and strengthen the strengths. Ultimately, it was a very beneficial process. Maybe we should do it every other year.”
