A PLAN TO STRENGTHEN MÉTIS ENTREPRENEURS ACCESS TO CAPITAL. Métis National Council October 15, Submitted to Aboriginal Business Canada

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1 A PLAN TO STRENGTHEN MÉTIS ENTREPRENEURS ACCESS TO CAPITAL Métis National Council October 15, 2009 Submitted to Aboriginal Business Canada

2 1 TABLE OF CONTENTS 1.0 EXECUTIVE SUMMARY 2.0 PROJECT BACKGROUND 2.1 WHY THE BUSINESS PLAN WAS DEVELOPED 2.2 HOW THE PLAN WAS PREPARED 2.3 CONTACT INFORMATION 2.4 CONSULTATIONS 3.0 MARKET ANALYSIS 3.1 ACCESS TO MARKET 3.2 MARKET DEMAND 4.0 MÉTIS NATION SYNDICATED LOAN POOL (MNSLP) 4.1 OWNERSHIP AND GOVERNANCE 4.2 MANAGEMENT 4.3 LOAN PROCESS 5.0 PROJECT FINANCING 6.0 FINANCIAL PROJECTIONS 6.1 Capital Contributions 6.2 Loans 6.3 Revenues 6.4 Expenses MCC Expenses MNSLP Expenses 6.5 Financial Projections Model 7.0 RISKS AND MITIGATION 8.0 ALTERNATIVE INVESTMENT STRATEGY 9.0 CONCLUSIONS 10.0 IMPLEMENTATION PLAN APPENDICES 1 Financial Projection Model-Métis Nation Syndicated Loan Pool 1.

3 2 2- Modified Financial Projection Model-Métis Nation Syndicated Loan Pool 2.

4 3 1.0 EXECUTIVE SUMMARY There is market demand of $9 million each year for loans in excess of $250,000 which Métis Capital Corporations (MCCs) are unable to serve because of their limited capital resources, the need to diversify portfolio risk, and caps on their lending authorities. As the capital needs of some of their clients have grown considerably over the years, they have been prevented from servicing this important source of market demand. As a consequence, the MCCs have been denied the ability to earn a higher return on their investment and expanding Métis businesses are being denied developmental financing for larger projects that could drive the economy of Métis communities. In a Validation Seminar that was critical in the development of this Business Plan, the three MCCs and their parent political organizations endorsed the establishment of a Métis Nation Syndicated Loan Pool (MNSLP) that will enable the MCCs to access the mid-range loan market (i.e loans between $250,000 and $1 million) and enhance their financial viability and sustainability. The MNSLP will be owned in equal measure by Apeetogosan (Métis) Development Inc., SaskMétis Economic Development Corporation, and Louis Riel Capital Corporation. It will be governed by a seven-member Board of Directors representing the MCCs, their parent political organizations and a seventh member, an independent Chairperson who will vote only to break ties. MCCs will continue to provide loans under $250,000 independent of MNSLP. The syndicated lending of MNSLP will apply to business loans in excess of $250,000. Loan proposals involving MNSLP will originate with an individual MCC which will submit the proposal to the Pool once it had established its own interest in becoming a participating lender. Any MCC seeking to obtain loan capital from MNSLP will be required to provide the first $250,000 of any loan exceeding $250,000 and the MNSLP will provide the remainder. The lead MCC and the Pool will make their lending decisions independently. The business plan is proposing a $5 million annual capital contribution by the Government of Canada to MNSLP over four years for a total contribution of $20 million. Given the requirement for an MCC to contribute $250,000 to any syndicated loan and an average sized loan of $600,000, Canada s contribution will generate a further $3,571,428 contribution from the MCCs or $14,285,712 over four years. The total capital contribution of the Government of Canada and the MCCs to the Métis Nation Syndicated Loan Pool will be $8,571,428 each year or $34,285,712 over 4 years. MCCs will have a strong incentive to contribute to the Pool since they will earn all the interest and net income from the syndicated lending and will be required to repay only the loan capital to the MNSLP. Given its own substantial skin in the game, the lead MCC on any syndicated loan will be responsible for the administration of the loan and client interface. 3.

5 4 It has been assumed that the equity provided by the MNSLP clients will, on average, represent 20-25% of the collective amount loaned by the MNSLP and its lead MCC partner. The typical MCC client seeks equity contributions or grants from ABC as a key part of their financing. It is recommended that as part of the current review of the ABC program and this business plan, serious consideration should be given to transferring the administration of an equitable portion of ABC business equity grants to the MCCs. A MNSLP financial projection model was developed to determine the effectiveness of the MNSLP as a means of enabling the MCCs to service the mid-range loan market and achieve financial self-sufficiency. The key assumptions used in developing this model including capitalization, loan activity, revenues and expenses, are explained in this report. The model demonstrates that the MCC s return on investment from its syndicated loan portfolio will be much higher than on its non-syndicated loan business. The average annual net income for the MCCs during the loan repayment period will be almost $1.1 million, with an average annual return on investment of 4.5%. During this period, 73 loans with an average size of $600,000 and total value of $43,800,000 will have been made. This higher return on investment will enable two of the MCCs to become self-sustainable and (at least) one of them to become profitable. The business plan described the potential risk factors to MNSLP and outlined ways of managing these risks. One of the ways to mitigate the risk of capital depletion is to move the Pool into more profitable forms of investment. The business plan looked at the market demand for private equity in the Métis business community and at two private equity funds that are attempting to meet this demand, the First Nations and Métis Fund and the CAPE Fund. With Aboriginal Business Canada itself exploring a new role for Aboriginal capital corporations as equity investors in its successor program, the report proposes MNSLP consider this alternative investment strategy either on its own or partnering with other pools, leveraging its knowledge of the Métis business community which is so critical to deal flow. Toward that end, a modified financial projections model is presented with a schedule for repayment of principal that would enable MNSLP to enter this form of investing by Year 5. The report concludes that, with their historical capitalization and profitability challenges, the MCCs are locked into high cost, high risk developmental financing. The syndicated loan pool set out in this report will enable them to access the mid-range loan market, satisfying proven market demand for these loans and facilitating their move toward financial sustainability and profitability. Based on the findings of this study, the authors have concluded that the Government of Canada and the MCCs should proceed with the capitalization of the MNSLP. 4.

6 5 2.0 PURPOSE OF BUSINESS PLAN 2.1 Why the Business Plan Was Prepared Several developments since the fall of 2008 have resulted in new threats and opportunities for Métis businesses. A global credit crunch and worldwide recession have reduced access to capital for businesses, including Métis businesses. In response to this crisis, the Federal Government s economic stimulus package is investing in the economy, particularly through infrastructure projects that create new and expanded opportunities for businesses, including Métis businesses The Federal Framework for Aboriginal Economic Development was introduced. In the framework, the Government of Canada established a number of strategic priorities, including a commitment to strengthen Aboriginal entrepreneurs access to capital. The emerging requirement of the duty to consult and accommodate potentially opens doors for business partnerships and procurement opportunities for Métis and other Aboriginal people. In February 2009, in response to these developments, the Métis National Council released Toward a Canada-Métis Nation Economic Development Framework, a strategy for economic development which aims to see Métis citizens as full participants in the Canadian economy. The plan specifically recommended new measures to strengthen Métis businesses and build their capacity to create wealth and new jobs for Métis people and other Canadians. These measures included: The expansion of loan capital of existing Métis Capital Corporations (MCCs). A larger cap on MCC loans to serve the mid-range loan market. The devolution of Métis small business programs from Aboriginal Business Canada to Métis financial institutions. The creation of an equipment capital fund and help with bonding, so Métis companies can participate in larger projects, particularly the construction and retrofitting of Métis housing; and The establishment of new MCCs in B.C. and Ontario. It the context of these developments, MNC President Chartier, and his advisors met with Minister Strahl, Federal Interlocutor for Métis, to discuss Métis economic development issues. This document was developed in response to a request from the Minister to 5.

7 6 submit a business plan that would offer financial stimulus to the Métis people and entrepreneurs through Métis Capital Corporations. 2.2 How the Business Plan Was Prepared The MNC engaged professional consultants to develop a business plan for Aboriginal Business Canada and Minister Strahl. The consultants undertook the following steps: Meeting with client and stakeholders to launch the consulting program. Preparing a description of the consulting program and deliverables. Undertaking a review of current and best practices in Aboriginal and minority investment, including practices in Canada and the United States, and to a lesser extent Australia and New Zealand. Key informant interviews. Preparing a report on the finding of the environmental scan and presenting various options for review by MNC stakeholders. Holding a validation seminar with key stakeholders to assess and refine the options. Preparing final recommendations and a report to the client. The findings of the environmental scan, including the review of current and best practices, are included as attachments to this document. The scan and program options were presented at a validation seminar held in Saskatoon on September 1, The seminar reinforced the consultant s research of best practices and program options. The stakeholders came to a consensus around a recommendation to establish a Métis capital pool for syndicated lending, which is presented in the following sections. 2.3 CONTACT INFORMATION MÉTIS NATIONAL COUNCIL 350 Sparks St., Suite 201 Ottawa, ON K1R 7S8 Tel: (613) Fax: (613) Toll Free: (800) wendaw@metisnation.ca ATTN: Wenda Watteyne, Executive Director 6.

8 Consultations The following were consulted during the preparation of this plan: Table of Key Informants Key Informant Affiliation Mike Ivy Manger, Apeetogosan Capital Corporation; Greg Fofonoff CEO, SMEDCO Paul Paradis General Manger, Louis Riel Capital Corporation Marc Leclair Pres., Leclair Infocom John Weinstein Consultant to MNC Rod Duguid VP, Saskatchewan Entrepreneurial Fund($50M) Vern Bachiu Consultant, Westcap Mgt.Ltd. Derek Murray President, DMCA, Consultant to Enterprise Saskatchewan Table of Validation Seminar Participants Participant Affiliation Clement Chartier President, Métis National Council Robert Doucette President Métis Nation-Saskatchewan David Chartrand President, Manitoba Métis Federation Mike Ivy Manger, Apeetogosan Capital Corporation; Greg Fofonoff CEO, SMEDCO Paul Paradis General Manger, Louis Riel Capital Corporation Marc Leclair Leclair InfoCom John Weinstein MNC Administration Max Morin MNS Jack Parker MMF Muriel Parker MMF Martin Aubichon observer Gabe Lafond MNS Bob McLeod MNS Mark Hanley President, Points West Management Consultants Paul Hanley VP Research, Points West Management Consultants 3.0 MARKET ANALYSIS 3.1 Access to Market 7.

9 8 Since their inception in the late 1980s, more than 50 Aboriginal Financial Institutions (AFIs) in Canada have provided over $1.3 billion in financing to 13,000 Aboriginal small businesses creating 32,000 jobs. Métis Capital Corporations (MCCs) in the Prairie Provinces, which are part of the AFI network, have loaned over $75 million, supporting over 2000 businesses and creating thousands of jobs. The success rate (i.e. the number of businesses remaining active after five years) of Métis businesses supported by MCCs is in the 70-80% range. This contrasts with the entire AFI sector, with a success rate of about 58%, and the Canadian norm of 33% of businesses remaining active after five years. Like other AFIs, the MCCs have been characterized by high acceptance rates for new accounts and a relatively good loan performance, based largely on their mandate to serve the community rather than shareholders and to use community-based credit assessment tools which otherwise would not enable them to lend to clients who often find themselves in weak financial situations. This developmental lending approach carries with it certain drawbacks. Serving a clientele which often requires smaller size loans and is scattered across entire provinces, often outside major urban centres, carries with it higher costs. Moreover, like the other AFIs launched in the 1980 s from a very limited capital base, they have not been able to expand through operating surpluses. In Manitoba and Saskatchewan, the MCCs have utilized all of their interest income to finance their operations and have required additional capital contributions or top-ups. The MCC in Alberta, while not requiring recapitalization, has not been able to grow much from its original loan capital base. The limits on the capital resources of MCCs has meant that as the capital needs of some of their clients have grown considerably over the years, they have been prevented from servicing this important source of market demand. Their inability to assume the risk on a large single investment reinforced by the need to maintain diversification of portfolio risk and limits on the maximum size of an individual loan has had profound consequences. They have been kept out of larger, viable business projects which could offer higher margins, given the attractive lower incremental cost of administering one of these loans relative to a multiplicity of smaller loans of cumulative equal value. 8.

10 9 Furthermore, expanding Métis businesses are being denied developmental financing for larger projects that could drive the economy of Métis communities. Loan syndication has been employed to address these challenges faced by AFIs. In Saskatchewan, a number of AFIs have syndicated together on larger loans and operated on a deal by deal basis. The AFIs found that their loan performance on syndicated loans was better than on loans made by individual AFIs, an important factor being the due diligence applied by each member of the group. Syndicate lending enabled them to do deals which they otherwise would not have done because of loan size as well as the level of risk associated with certain sectors and early stage business. Similar considerations have been guiding the MCC managers in their support of a Métis Nation syndicated loan pool that would enable them to take on developmental loans on larger projects that exceed the capacity of individual MCCs, help fill the gap in Métis Nation financing, and improve MCC capacity and financial viability. 3.2 Market Demand The MCC managers all reported that they currently receive enquiries for credit worthy loans which exceed their lending authorities. They also reported that they are aware of Métis businesses which required such larger loans but had not approached them, often due to marketplace perceptions of their limited lending thresholds. It should be noted that the three MCCs do not advertise or market loans over $250,000. The three managers provided direct information that in a twenty month period in , 16 loans to Métis businesses, with an average size of approximately $950,000 per opportunity, were declined due to lack of capital and the existence of a lending cap. Table A details the internal demand from the three Prairie MCCs. The range in size of these opportunities was between $375,000 and $3 million, totaling more than $15 million. This points to an annual market demand of about $9 million without the aid of marketing a loan product over $ 250,000. Given the large variation in the size of the declined loan opportunities and the need to impose a maximum loan size to ensure reasonable diversification of portfolio risk, the median of $600,000 rather than the 9.

11 10 $950,000 mean has been selected as the average size of a loan from a syndicated pool for the purpose of projections. Table A METIS CAPITAL CORPORATIONS: LOAN INVESTMENT REQUESTS DECLINED DUE TO $250,000 CAP PROJECT LOAN TYPE INDUSTRY/SECTOR LOAN SIZE Insurance & Investment Mortgage Service $800,000 Retail & Mortgage Retail $3,000,000 Office Complex Mining Equipment Mining $2,000,000 Exploration Drill Rig Small Equipment Transportation $2,500,000 Airline & Charter Fitness Centre Mortgage Service $600,000 Oil Field Equipment Oil & Gas $500,000 Service Trucks Resort Term Loan Tourism $700,000 Car Wash Term Loan Service $1,000,000 Jewelry Term Loan Retail $600,000 Store Mfg. & Term Loan Manufacturing $550,000 Distribution Construction Term Loan Construction $450,000 Fish Term Loan Fishing $650,000 Processing Restaurant Term Loan Hospitality $475,000 Const/Reno Term Loan Construction $575,000 Service Term Loan Hospitality $375,000 business Service Term Loan Retail $375,000 business Total $15,150,

12 11 There are more than $74,000,000 in Métis Nation projects now under consideration for funding under Canada s Economic Action Plan and its stimulus-related Funds. Most of these projects involve the construction, expansion or retrofitting of post-secondary education institutions, housing projects, office buildings, and tourism and heritage sites. Table B provides a summary of these projects sponsored by Métis Nation organizations and institutions. Table B - Métis National Council Affiliate Stimulus Projects Name of Fund Total Project Cost Financing Required Infrastructure Stimulus $24,000,000 $11,000,000 Knowledge Infrastructure $31,000,000 $10,000,000 Housing $19,000,000 $13,000,000 The sponsors will require $34,000,000 in financing beyond that currently identified for these projects to proceed. Some of this will come from provincial and municipal capital contributions but there will also be a need for partial private financing that could be supported by the sponsors rental revenues from programs, tenants, and businesses. There will also be demand for financing from Métis construction firms and contractors engaged in these or other stimulus-related projects. 4.0 MÉTIS NATION SYNDICATED LOAN POOL (MNSLP) In the Validation Seminar, managers of the three MCCs and their parent political organizations endorsed the establishment of a Métis Nation Syndicated Loan Pool (MNSLP). The Pool will be mandated to work with the MCCs and the government of Canada to strengthen Métis entrepreneurs access to capital by way of syndicated lending which will enable the MCCs to access the mid-range loan market (i.e loans between $250,000 and $1 million) and enhance their financial viability and sustainability. 11.

13 MNSLP Ownership and Governance The MNSLP will be owned in equal measure by Apeetogosan (Métis) Development Inc., SaskMétis Economic Development Corporation, and Louis Riel Capital Corporation. It will governed by a seven-member Board of Directors. Each of the MCCs will appoint one member to the Board of Directors. Each of their parent political organizations- the Métis Nation of Alberta, Métis Nation- Saskatchewan and Manitoba Métis Federation respectively- will appoint one member to the Board of Directors. A seventh member of the Board of Directors will be appointed by and must be mutually acceptable to the other six Board members and will serve as an independent Chairperson who will vote only to break ties. The MNSLP Board will be responsible for ensuring that the Pool operates in a safe and prudent manner and for ensuring adherence to the standards of sound business and financial practices. It would discharge this responsibility by: Establishing appropriate and prudent investment and risk management policies and procedures; Establishing standards of business conduct and ethical behaviour; Appointing or contracting appropriately skilled and experienced management to implement the Board s objectives; Establishing the responsibilities, accountability and authority of subcommittees (where applicable); Deciding on whether or not to approve the Pool s participation in loans based on careful consideration of due diligence conducted by the Manager and the assessment of Board members; Evaluating the effectiveness of each of the Pool s governance components. 4.2 Management Management of the MNSLP will be provided by a credentialed Manager. The Manager will assist the Board in the development of effective investment management and risk 12.

14 13 management policies and procedures toward ensuring the viability of the Pool. The primary function of the Manager will be to conduct independent due diligence on loan proposals forwarded to the Pool by MCCs and to make recommendations on whether or not to provide financing. Given the limited number of new loans (under 15 per year) anticipated under this Plan and the primary responsibility of the MCCs in administering the loans, it is recommended that the MNSLP Board contract an individual or firm to provide these services on a part-time basis. 4.3 Loan Process MCCs will continue to provide loans under $250,000 independent of MNSLP. The syndicated lending of MNSLP will apply to business loans in excess of $250,000. Loan proposals involving MNSLP will originate with an individual MCC which will submit the proposal to the Pool once it had established its own interest in becoming a participating lender. Pursuant to the Validation Seminar consensus, any MCC seeking to secure loan capital for their clients from MNSLP would be required to provide the first $250,000 of any loan exceeding $250,000 and the MNSLP will provide the remainder. Mark Hanley :28 PM Formatted: Bullets and Numbering The lead MCC and the Pool will make their lending decisions independently. The decision would fundamentally be a two-step process with the lead MCC doing its due diligence and screening before proposing the loan to MNSLP management for its review. The Pool s Management will conduct its own due diligence and will report its review and recommendation to the Board for its consideration and decision. If the loan proposal is approved by the MNSLP Board, the MCC and the MNSLP will have a single standardized loan agreement with the client as well as a separate partnership agreement between themselves. It was agreed at the Validation Seminar that the MCC and MNSLP will register their security interest in the assets of the borrower on a pari passu basis. Given its own substantial skin in the game, the lead MCC on any syndicated loan will be responsible for the administration of the loan and client interface, with some exceptions being provided for in the event of delinquency and/or default. 13.

15 PROJECT FINANCING This business plan estimates the annual market demand for Métis Nation syndicated loans to be $9 million based on the requests for loans above $250,000 declined by the MCCs each year. This estimate is considered reasonable since the MCCs have never promoted their ability to lend above this threshold which in turn has certainly influenced marketplace perceptions. It is highly likely that there is pent-up demand for this larger-sized loan product. The business plan is proposing a $5 million annual capital contribution by the Government of Canada to MNSLP over four years for a total contribution of $20 million. Given the requirement for an MCC to contribute $250,000 to any syndicated loan and the use of the $600,000 median of the declined loans as the average size of MNSLP loans, this $5 million federal contribution will generate a further $3,571,428 contribution from the MCCs (250/350 x 5 million) or $14,285,712 over four years. The annual MCC capital contribution is considered reasonable because it amounts to approx. $1,190,000 per MCC which should be covered by the their cash available for loan disbursements. The total capital contribution of the Government of Canada and the MCCs to the Métis Nation Syndicated Loan Pool will be $8,571,428 each year or $34,285,712 over 4 years. MCCs will have a strong incentive to contribute to the Pool since they will earn all the interest and net income from the syndicated lending and will be required to repay only the loan capital to the MNSLP. Consequently (as the financial projections will demonstrate), an MCC s return on investment from its syndicated loan portfolio will be much higher than on its non-syndicated loan business. This higher return on investment will enable two of the MCCs to become self-sustainable and (at least) one of them to become profitable. It has been assumed that the equity provided by the MNSLP clients will, on average, represent 20-25% of the collective amount loaned by the MNSLP and its lead MCC partner. This equity ratio reflects the profile of the typical MNLSP client as being a 14.

16 15 mature developmental client or a strong start-up business with more resources available than the average MCC client. The typical MCC client seeks equity contributions or grants from ABC as a key part of their financing. MCCs report that a very high proportion (80%+) of their loans involve ABC grants to borrowers. Moreover, MCCs count on the ABC equity contribution to absorb approximately 50% of the unsecured risk of loss on each loan. Since the transfer of ABC to INAC from Industry Canada, the receipt of program funds has slowed considerably. This is resulting in delays causing some opportunities to be abandoned and some borrowers to incur additional cost for interim financing while the grants are being processed through INAC channels. MCCs can provide a more streamlined and community based delivery system for these equity contributions to their clients. It is recommended that as part of the current review of the ABC program and this business plan for MNSLP, serious consideration should be given to transferring the administration of an equitable portion of ABC business equity grants to the MCCs as they are often critical to clients in meeting equity requirements for loans. Prior to loan disbursement, the Government of Canada contributions will be deposited into the MNSLP bank account and interest earned will belong to the Pool. (Once the funds are drawn from the Pool to make a syndicated loan, the MCC earns the interest). 6.0 FINANCIAL PROJECTIONS A MNSLP financial projection model has been developed to determine the effectiveness of the MNSLP as a means of enabling the MCCs to service the mid-range loan market and achieve financial self-sufficiency. This section examines each of the key assumptions used in developing this model including capitalization, loan activity, revenues and expenses. 6.1 Capital Contributions 15.

17 16 This model assumes a $34,285,712 capitalization of the Pool over a four year period. Of this amount, the Government of Canada will contribute $20,000,000 (58%) and the MCCs will provide $14,285,714 (42%). 6.2 Loans Consistent with the results of the market demand survey, the MNSLP loan volume is assumed to be constant at $8.57 million annually over the four year capitalization period. It is assumed that loan disbursements will be spread evenly throughout the year. As noted in Section 3.2, the average combined loan size has been assumed to be $600,000, with the lead MCC contributing $250,000 and MNSLP contributing the remaining $350,000. This ensures that the lead MCC is participating in syndicated loans at the highest level of its lending authority. The average repayment period for MNSLP-MCC loans has been assumed to be seven years which corresponds with the 5-10 year range of terms set by other syndicates such as the Saskatchewan AFI syndicate 6.3 Revenues The financial projection model assumes an average loan interest rate of 8% for MNSLP- MCC clients, based on a fixed interest rate approach. This is the average of the rates suggested by the MCC managers. The model assumes that each loan generates a fee of $2,000 per year which will be paid to the MNSLP to offset the costs of its credentialed Manager. The fee will be paid by the borrower and adds one third of a percent to the effective cost of the loan. 6.4 Expenses MCC Expenses aschroer :37 PM Formatted: Bullets and Numbering Operating expense and bad debt projections result primarily from discussions with the MCC managers. Under this plan, the MCCs will assume most of the costs of syndicated lending as a function of their lead role in initiating and administering the loans and earning all the net income from the operations. 16.

18 17 The financial projections model assumes an Operating Expense of 1.33% of Total Portfolio. The cost of reviewing and maintaining each large loan file will be $750- $850 per loan, which is only a few hundred dollars more than a loan below $250,000, but the MCCs have high governance costs. A Board meeting can cost over $8,000 and at least one or two additional meetings are anticipated in view of these new loans. The MCCs will also incur costs participating in MNSLP Board meetings. Promotion and marketing of the new Pool was identified as a key requirement during the validation seminar. Métis entrepreneurs will need to become aware of this new opportunity and the MCCs will incur considerable expense promoting their new lending capacity. Provision for Bad Debt has been projected at 3% of the pool s Total Portfolio. This is based in large part on the historical operating experiences of the three MCCs and the average loan loss projected by the managers MNSLP Expenses The major expense of the Pool will be associated with a credentialed Manager who will ensure independent due diligence of loan proposals. In view of the relatively modest number of new loans anticipated under the plan, it is recommended that these services be outsourced to a credentialed individual or firm rather than engaging full-time staff. Other costs include legal and audit services. The financial projections model anticipates offsetting these expenses with fee income as well as interest on funds prior to their disbursement to MCCs for syndicated lending. 6.5 Financial Projection Model Métis Nation Syndicated Loan Pool Appendix 1: Financial Projection Model - Métis Nation Syndicated Loan Pool describes the performance of a portfolio of syndicated loans at 8% interest with a seven year term, with principal and net income reinvested. The model produces a profitable 17.

19 18 outcome, modest perhaps relative to other investments, but considerably better than those experienced by MCCs on their non-syndicated loan portfolios. The average annual net income for the MCCs during the 10 year period is almost $1.1 million, with an average annual return on investment of 4.5%. During this period, 73 loans with an average size of $600,000 and total value of $43,800,000 will have been made. 7.0 RISKS AND MITIGATION Some of the key requirements of risk management are addressed in the fundamentals of the Pool. Risk is accounted for in the bad debt provisions in the MSNLP model developed for this analysis. Significant bad debt is anticipated in the models and is based in large part on the historical operating experiences of the three MCCs. Also, syndication mitigates risk by sharing the risk of default among the partners. At the same time, each of the lending partners provides independent review of each investment, adding to the degree of certainty The increased capacity of the MCC/MNSLP partnership means that higher-quality investments will be targeted, thereby reducing risk. To ensure reasonable diversification of portfolio risk, the MNSLP Board and management should consider the imposition of a maximum loan size of $1.0 - $1.25 million. In addition to these measures, both the MCCs and MNSLP should adopt and implement policies and procedures to ensure sound credit risk management. Ultimately, the greatest risk facing the MNSLP is the potential inability of MCCs to repay the capital in the event the financial projections prove to be inaccurate. Premised on the need to enhance the financial performance of MCCs through syndicated lending, the MNSLP model reinvests principal payments, thereby exposing the full capital of the MNSLP for a protracted period of time. No decision was taken by the sponsors of this business plan nor the MCC managers on a schedule for repayment of capital. Mark Hanley :28 PM Formatted: Bullets and Numbering While the MCC and MNSLP will jointly secure their loans by registering their security interest in the assets of the borrower on a pari passu basis, consideration should be given to the MNSLP treating its capital advanced to the MCC as a secured interest-free 18.

20 19 loan if the Pool is to be protected from depletion. This would require MNSLP to take as security the loan assets and receivables of the MCC. Another way to mitigate risk and enhance the sustainability of MNSLP itself is to move the Pool into more profitable forms of investment, a scenario explored in the next section. 8.0 ALTERNATIVE INVESTMENT STRATEGY After dealing with larger businesses over a period of time, MCCs and MNSLP may be in a position to leverage their expertise into new and more profitable areas of financing. Just as there is market demand for larger-sized loans in the Métis business community, there is also sure to be demand for equity capital from those entrepreneurs in need of patient capital to grow their businesses. In 2007, companies supported by venture capital or private equity created almost 150,000 direct and indirect jobs in Canada. Their contribution to Canada s GDP was $14.5B, or almost 1% of Canadian GDP. Private equity-supported companies grow five times faster than other companies. Mark Hanley :28 PM Formatted: Bullets and Numbering A number of private equity funds have emerged to meet the demand for equity capital from Aboriginal entrepreneurs and were part of this study as potential models for alternative investments by MNSLP. The First Nations and Métis Fund ($20 M) is administered and operated by First Nations and Métis Fund Inc., which is wholly owned by Saskatchewan s Crown Investments Corporation. Westcap Mgt. Ltd. of Saskatoon provides professional management services for the Fund under a contract. The Fund makes investments between $1 million and $3 million in the form of debt; sub-debt; equity; and/or combination of various financial instruments. The First Nations and Métis Fund will consider making investments for the following purposes: Start-ups new businesses which have developed or acquired products or services and are ready to proceed to commercialization; 19.

21 20 Early-stage investments businesses which have been in operation for some time, but have not yet fully developed their product or service; Expansions businesses which require financing to expand sales, or to launch a new product or service; Management buyouts adding new management and capital to acquire control of a business and realize its potential for expansion; and Restructuring or turnarounds adding investment and making changes in management, staffing, operations or marketing strategies to help the business succeed. The CAPE Fund is a $50 million private-sector investment fund initiated by 21 of Canada s leading companies, individuals and U.S. based Foundations. CAPE Fund will be focused on mid-market opportunities with a strong degree of Aboriginal involvement and connection to Aboriginal communities throughout Canada. Fund investments will generally be between $1 million and $7.5 million in the aggregate, per investee. These may occur in one or more rounds of investment. Aboriginal businesses anywhere in Canada are eligible. The Fund will invest in virtually all business segments albeit with some sector restrictions. The Fund will proactively seek out both financial and industry partners to facilitate and accelerate the growth of its investee companies. The Fund focuses on projects that are linked, either through ownership, employment or geographic proximity, to an Aboriginal group or community. It will only invest in Portfolio Companies that the Investment Committee determines possess the following strengths or features: o Long term economic sustainability (or the reasonable promise thereof) must be present o Clear and defined market opportunity o An articulate, realistic and complete business plan o Ability to provide CAPE Fund with an appropriate return on its investment o Potential to sell ownership and transfer management to Aboriginal entrepreneurs or communities within a reasonable period of time, and 20.

22 21 o could provide a platform for Aboriginal management training CAPE Fund will invest as a partner in its investee businesses through a selection of equity and quasi equity instruments. These may take the form of: o Common shares o Retractable preferred shares, dividend and non dividend bearing, with current or cumulative dividend o Debentures, interest bearing (either current or cumulative) that may be convertible into equity (at the option of CAPE) or which may have warrants to purchase equity attached to them. It is anticipated that the average hold period of the Fund s investments will be 5 to 7 years. Investments will be structured to provide the Fund with an exit opportunity from the investment within this time period or slightly beyond. It is fundamental to the Mission, that CAPE Fund provides an opportunity for the Aboriginal communities involved to repurchase its interest in each investee company. A major problem confronting the private equity and venture capital funds targeting Aboriginal investments is their inability to generate sufficient deal flow owing largely to their lack of familiarity with the often unique circumstances surrounding these investment opportunities. MNSLP and MCCs may be in a strong position to source these opportunities and invest on their own or co-invest with the other funds. MNSLP investment could take the form of straight equity (common shares) or, if an income stream was preferred, interest-bearing convertible debentures or dividend yielding convertible preferred shares that carried upside potential in the ability to convert these instruments into equity. It should be noted that Aboriginal Business Canada is exploring a new role for AFIs as equity investors in its successor program. It is recommended that the Government of Canada and the MCCs should consider the possibility of the MNSLP moving into equity 21.

23 22 investment in the future. Toward that end, consideration should be given to a schedule for repayment of principal that would enable MNSLP to assume this role. Appendix 2: Modified Financial Projection Model- Métis Nation Syndicated Loan Pool assumes that principal payments will remain in the bank at an assumed interest rate of 2%. This rate is considered reasonable, given the ability of MCC managers to lock in these funds for longer periods under this scenario. By Year 5 the Pool will have accumulated $11,138,000 in cash. Thereafter, the retained principal savings grow rapidly until there is $39,153,000 in the bank by Year 10. Serious consideration should be given to the possibility, starting in Year 5, of allocating part of this cash for equity investments and the rest for continued lending At this point, a new arrangement can be worked out between the MCCs and MNSLP regarding the distribution of earnings from equity investing in order to place the MNSLP on a more self-sustainable course. 9.0 CONCLUSIONS With their historical capitalization and profitability challenges, the MCCs are locked into high cost, high risk developmental financing. A syndicated loan pool as set out in this report will enable them to access the mid-range loan market. This will satisfy proven market demand for these loans and, as the financial projections have shown, facilitate the move of the MCCs toward financial sustainability and profitability. The modfiied financial projections have also demonstrated that by retaining rather than reinvesting principal payments, the MNSLP will be in a position to move into equity investments in the 5 th Year in order to enhance its own financial sustainability. Based on the findings of this study, the authors of this report have concluded that the Government of Canada and the MCCs should proceed with the capitalization of the MNSLP. 10. IMPLEMENTATION PLAN If a decision is made by Canada and the MCCs to proceed with the establishment of a Métis Nation Syndicated Loan Pool along the lines established in the Business Plan, a 22.

24 23 formal agreement will have to be prepared that commits the parties to the project. The next steps to be undertaken include: MNSLP incorporation; Selection of the Board of Directors; Selection of management; Adoption of policies and procedures; and Marketing the new lending capacity of MCCs to potential clients. Mark Hanley :28 PM Formatted: Bullets and Numbering aschroer :37 PM Formatted: Bullets and Numbering 23.

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