OREANDA-NEWS. S&P Global Ratings affirmed its 'A-' long-term issuer credit and senior unsecured debt ratings on not-for-profit lender First Nations Finance Authority (FNFA). The outlook is stable.

"The ratings on FNFA reflect our view of the authority's solid competitive position in a niche market as an important lender to First Nations," said S&P Global Ratings credit analyst Jennifer Love.

The ratings also reflect the authority's prudent structural mechanisms, including its intercept mechanism, which enhance asset quality; ongoing financial support for operations from the federal government; and moderate leverage. We believe that FNFA's low-but-improving level of profitability and the concentration of its loan portfolio somewhat offset these strengths. We have assessed the authority's stand-alone credit profile (SACP) at 'bbb'.

The ratings further reflect our belief that the FNFA benefits from a moderately high likelihood of receiving extraordinary support from the federal government, resulting in an uplift of two notches from the SACP. We believe the authority has a strong link with the federal government, which is demonstrated by the government's funding support for its operations. We also believe the FNFA plays an important role for the government via its statutory mandate and public policy role to facilitate access to capital by First Nations. Also supporting our assessment of the authority's important role to the government is the political visibility of First Nations issues generally, and the considerable need for capital on First Nations' land.

The FNFA is a financial intermediary that supports access to credit for First Nations. It borrows in the capital markets and on-lends the proceeds to its borrowers who are exclusively First Nations. Borrowers use the loan proceeds for capital infrastructure on their lands, and secure the loan with a pledged revenue stream. The authority issued its inaugural bond in 2014. Although it was created via federal legislation, the FNFA is not an agent of the Government of Canada. Nevertheless, we believe the authority benefits from a strong and supportive relationship with Canada.

The stable outlook reflects our expectation that the authority will continue to expand its loan portfolio, interest income, and fees, maintaining profitability in the next two years. We expect that asset quality will remain good.

A deterioration in asset quality suggesting weak underwriting decisions and requiring joint and several support from borrowers could lead us to lower the ratings. In addition, increased debt issuance without adequate capital support, leading to debt-to-equity ratios above 50x would put downward pressure on the rating. Also, we could downgrade the FNFA if we revised the likelihood of extraordinary support to moderate or low if the federal government's oversight of the authority lessened or the importance of its policy role diminished.

Sustained profitable operations, coupled with earnings retention, increasing portfolio diversification, and a stronger capital base could put upward pressure on the SACP. We could upgrade the authority if we were to revise the likelihood of extraordinary support to high or greater because of increased importance of the authority's public policy role or strong direction by the federal government in the FNFA's strategy development and day-to-day operations.