Written By Ashley White, Luke Morrison and Will Osler
On May 4, 2020, the Alberta Indigenous Opportunities Corporation (AIOC) released its program guidelines by which it will evaluate investment proposals made by Indigenous communities (ICs). We provided an initial overview of the AIOC and its key investment criteria in an earlier blog post, The AIOC – A Framework for Meaningful Ownership and Economic Reconciliation.
At a high level, the AIOC has established two separate programs: (1) the Loan Guarantee Investment Program, and (2) the Capacity Grant Program. The guidelines provide clarity and precision around the types of funding and support available under these programs, and how interested parties can apply. While as of the date of this blog, the application process to participate in these programs is not yet open, the AIOC website indicates it will begin accepting applications soon.
With Alberta and Canada facing unprecedented economic hardships and uncertainties in the wake of the COVID-19 pandemic and the oil price collapse, the investment support being made available to qualified ICs through the AIOC's programs could be instrumental in facilitating the further development and enhancement of natural resource projects at a time when such progress is critical to restarting our economy.
Loan Guarantee Investment Program
Under the Loan Guarantee Investment Program (LGIP), the AIOC will backstop successful applicants for the full or partial value of a loan. As announced previously, up to $1 billion in aggregate has been committed by the Government of Alberta for the AIOC, a significant portion of which is expected to be allocated to the LGIP.
The AIOC will administer the LGIP under its Loan Guarantee Investment Program Guidelines, the key aspects of which are summarized below.
LGIP Eligibility Criteria
The LGIP guidelines confirm what was announced previously by the AIOC with respect to the eligibility criteria for ICs looking to obtain backstop coverage, including the $20-million minimum investment requirement, and that a project located outside the province may be eligible where it can be shown to benefit Alberta’s natural resource sector.
The LGIP guidelines also clarify that only investments made by entities that are 100% owned by ICs are eligible for support under the LGIP. Entities that are partially or entirely owned by Indigenous entrepreneurs are not eligible for support. This is consistent with policy statements regarding one of the core principles and mandates of the AIOC—to increase the ability for ICs to obtain meaningful ownership stakes in energy projects in order to create new income streams that can be used to develop community-level programs and services.
Two-Stage LGIP Application Process
ICs seeking a loan guarantee from the AIOC will first submit a "Pre-Application", which is intended to provide an overview of the proposed investment, the objectives of pursuing such funding, and a preliminary view on how the project will meet or exceed the program eligibility and criteria. The AIOC will use this information to make an initial determination of fit.
If the Pre-Application is approved, the applicant will prepare a Formal Investment Proposal, structured to include information according to the evaluation criteria (described below). If the Formal Investment Proposal is approved, the AIOC will provide terms and conditions associated with the approval that must be satisfied, along with the maximum value of the loan guarantee, and the guarantee terms. The AIOC has not committed to fixed timing for the evaluation process, although the LGIP guidelines indicate that reporting to the AIOC board will occur on a quarterly basis.
LGIP Evaluation Criteria
Those interested in submitting an application must address the program criteria set out in the LGIP guidelines. Below is a high-level summary of the criteria, along with some select examples of specific factors the AIOC may consider in assessing applications under the LGIP.
- Benefits to Indigenous Communities and Alberta. The applicant must show that the project will benefit ICs and Alberta as a whole. The AIOC will also consider factors such as environmental sustainability, breadth of the benefits of the project, inclusiveness, and future employment and capacity-building opportunities offered to ICs through the proposed life cycle of the project.
- Commercial and Investment Viability. The applicant should demonstrate that the project is viable and presents reasonable risk-adjusted commercial terms. The AIOC will give preference to lower risk projects already in operation and generating income, or that have a high level of operational certainty relative to projects that are still in the conceptual or development stage. Key considerations in this regard will include:
- the extent to which environmental, social, and governance (ESG) considerations have been taken into account in the project development model,
- whether the project involves third-party co-investment that improves the risk profile of the project,
- whether the applicant has direct meaningful investment in the proposed project, and
- the project's anticipated cash flow and debt service coverage ratio.
- Skill and Expertise. The AIOC will consider the expertise, track record and diversity of the individuals, management team, partners and other parties who are linked to the proposed project. The legal and professional advisory teams supporting the applicant, the governance structure of the applicant, and the ongoing business activities of the applicant and its affiliates will be key factors in this assessment area.
- Overall Strength of the Application. Other key criteria that the AIOC will consider in its evaluation of LGIP applications include:
- the overall commercial reasonableness of the investment,
- the status of negotiation and execution of definitive project agreements, and
- whether required corporate and Band Council approvals (or equivalent) have been obtained.
Other Key Requirements and Considerations For LGIP
The LGIP guidelines also introduce the following key requirements and considerations regarding the LGIP that were not previously disclosed:
- Guarantee Fee: As part of obtaining any backstop coverage from AIOC under the LGIP, applicants will be required to pay a loan guarantee fee to the AIOC. While the LGIP guidelines do not include a fixed amount or formula for calculating the guarantee fee, the following parameters have been provided:
- The AIOC will determine the applicable guarantee fee on a case-by-case basis with regard to the evaluation criteria, which implies that there will be both quantitative and qualitative aspects involved in the guarantee fee calculation.
- The LGIP guidelines do not set out the exact timing or components of the guarantee fee; however, the guidelines indicate that the fee is likely to include (a) a one time, up-front fee payable when the guarantee is to be provided (payment of which will be required as a condition to the guarantee taking effect), and (b) additional annual fees based on the outstanding balance of the loan (taking into account accrued but unpaid interest).
- If the applicant has received funding under any other government program, such funding cannot be used by the applicant to pay for the guarantee fees.
- The purpose of guarantee fees is to cover the AIOC's costs in administering and managing the LGIP.
- Timing For Provision of Guarantees: Loan guarantees will only be provided at the point of project close, once all regulatory approval and other project financing have been obtained, providing greater certainty that the project will proceed.
- Application Costs: Financial support provided by the AIOC through the LGIP cannot be used by applicants to recover costs incurred in connection with the application process (e.g., financial and legal advisory fees; costs passed on from the applicant's lender); however, applicants looking to recover such costs may apply for a capacity grant under the Capacity Grant Program (summarized in the section below).
- Meaningful IC Participation: The AIOC will consider whether the direct participation of the IC is meaningful relative to the financial resources of the IC. Investors or companies looking to partner with ICs on projects and obtain support under the LGIP will need to consider the overall financial commitment of the IC partner in the project and the ownership stake for the IC in order to meet the broader social and economic objectives of the AIOC.
Capacity Grant Program Guidelines
In recognizing the significant amount of technical and expert resources that will be required by ICs to satisfy the eligibility criteria for the loan guarantee, draft the underlying legal agreements, and support ICs' long-term investments in projects, the AIOC established the Capacity Grant Program (CPG). Under the CPG, grants will be issued to ICs in order to obtain third-party advice and expertise to support their investments.
The AIOC will administer the CPG under its Capacity Grant Program Guidelines (CPG Guidelines). The grants are intended not only to support ICs in their initial evaluation of a project, but can be used for ongoing strategic, operational, and risk management planning advice, and for initiatives to increase the internal capacity of ICs to help manage projects they have invested in. Grants awarded under the CPG can be used for, among other things, financial, legal, accounting or environmental advice and expertise in connection with the ICs project analysis and due diligence.
CPG Application Process
ICs seeking a capacity grant will submit a grant application with their Pre-Application for the loan guarantee. Alternatively, if the AIOC has approved the Pre-Application, the applicant can choose (or may be recommended by the AIOC) to apply for a capacity grant during the preparation of their Formal Investment Proposal.
The CPG Guidelines provide a non-exhaustive list of information to include in the application, which include budgets for third-party costs, names, qualifications and rates of proposed third-party service providers, proposed milestones, and names and qualifications of key individuals.
The AIOC has indicated its response time will be within 60 to 90 days of receipt of the application.
CPG Evaluation Criteria
Grants will be issued on a case-by-case basis having regard for the AIOC’s available funding capacity under its budget, strategic outcomes and the breadth and depth of capacity support needed. Preference will be given to applicants that are investing in a project close to completion. The amount of a capacity grant will be determined at the discretion of AIOC, up to the maximum amount to be set by Alberta Treasury Board and Finance.
The successful applicant will enter into a grant funding contract with the AIOC—the terms of which have not been made public, although a mark-up of the contract is to be included with an application. All funds allocated will be monitored to ensure performance measures, targets and funding objectives are achieved; however, details of such metrics or the review process have not been disclosed.
The financial backstop support and grant funding being made available by the AIOC will provide ICs and their current or potential co-venturers with opportunities to free up and redeploy capital and resources towards major project opportunities, while contributing to the long-term partnerships between ICs, government and industry that will be required for the energy infrastructure development in the current environment and beyond.
While ICs and industry now have a detailed roadmap and specific guidelines to follow for submitting applications for financial support and capacity grants, it is not currently known whether the AIOC will expand the scope of programs and financial resources even further into areas that involve the AIOC:
- issuing direct loans (or taking on an existing loan);
- acquiring and holding a direct stake in a project for the benefit of ICs; and/or
- entering into joint ventures or partnerships.
All of such areas would be within the mandate of the AIOC under its enabling legislation. Whether the AIOC considers such other types of involvement or programs in support of investments is likely to be a function of demand and the extent to which the $1 billion in allocated funding is committed under the initial programs.
If you have any questions about these matters, please contact any of the authors. For additional information regarding the COVID-19 pandemic, please see our COVID-19 Resource Centre.