Frequently Asked Questions

Does the NSMFC provide interim financing?

The policy of the Board is that only completed projects are financed through the issuance of debentures. The NSMFC does offer short-term financing to clients that have completed their capital projects and are waiting to participate in the debenture process.

What interest rate does the NSMFC charge?

The cost of the borrowing depends on the term of the debenture and market conditions. The pricing is based on the Province of Nova Scotia's cost of funds, plus a number of basis points for the NSMFC. The NSMFC also charges a fee for the reserve fund and covers issuing costs. NSMFC debenture prices have remained consistently lower than commercial banks and financial institutions.

How is interest calculated?

The NS Municipal Finance Corporation (MFC) frequently receives inquiries from clients on how they (the client) have calculated their semi-annual interest payment, and that it differs from the payment on their MFC repayment schedule.

Therefore, the MFC has to explain to the municipal client that a MFC debenture is not a “loan” but a “debenture”; two very different financial financing vehicles.

Loan Definition (Wikiedia)

In finance, a loan is the lending of money from one individual, organization or entity to another individual, organization or entity. A loan is a debt provided by an entity (organization or individual) to another entity at an interest rate, and evidenced by a promissory note which specifies, among other things, the principal amount of money borrowed, the interest rate the lender is charging, and date of repayment. A loan entails the reallocation of the subject asset(s) for a period of time, between the lender and the borrower. 

In a loan, the borrower initially receives or borrows an amount of money, called the principal, from the lender, and is obligated to pay back or repay an equal amount of money to the lender at a later time. 

The loan is generally provided at a cost, referred to as interest on the debt, which provides an incentive for the lender to engage in the loan. In a legal loan, each of these obligations and restrictions is enforced by contract, which can also place the borrower under additional restrictions known as loan covenants. 

Simplistic:

Principal x rate x time

Client: MFC clients typically think that their outstanding balance x current year interest rate x time is how interest is calculated. In fact, this is “NOT” the case.

Debenture Definition (Wikipedia)

In corporate finance, a debenture is a medium to long-term debt instrument used by large companies to borrow money, at a fixed rate of interest. The legal term "debenture" originally referred to a document that either creates a debt or acknowledges it, but the term is now used interchangeably with bond, loan stock or note. A debenture is thus like a certificate of loan or a loan bond evidencing the fact that the company is liable to pay a specified amount with interest. Senior debentures (MFC is a senior debt) get paid before subordinate debentures, and there are varying rates of risk and payoff for these categories. 

MFC Actual Calculation 

The MFC calculation is preformed like what an investor in bond would expect on the open bond market. Since MFC’s debentures have multiple interest rates, the interest calculation is a bit more complex than using one interest rate. By MFC having multiple interest rate, is means cost savings to municipal clients with lower rates in the earlier years, versus one rate that would be higher because of the longevity of a multi-year debenture. 

MFC: Each annual principal maturity has its own interest rate. The semi-annual interest to be paid has to take each principal amount, times its own interest rate, divided by "2", to capture the 6-month payment. See the long "drawn out" mechanics of how the repayment schedule is tabulated.

The following example is taken from an actual client who participated in the MFC’s fall 2014 Debenture Issue. The client participated for a 15-year loan term. Below, is only the first two (2) years of the debenture repayment, but it shows that each outstanding principal amount of this client’s loan, will always have its applicable interest rate, and therefore interest payment, tied to that principal amount. 

Calculation (exhibit):

Year #1 Interest Payments:
Year	Cash Flows	Int Rate		Annual Int	Semi-Int
1	362,032.00	1.2000%		4,344.38	2,172.19
2	362,032.00	1.3870%		5,021.38	2,510.69
3	362,032.00	1.6810%		6,085.76	3,042.88
4	362,032.00	1.9700%		7,132.03	3,566.02
5	362,032.00	2.2210%		8,040.73	4,020.37
6	362,032.00	2.4550%		8,887.89	4,443.94
7	362,032.00	2.6780%		9,695.22	4,847.61
8	362,032.00	2.8730%		10,401.18	5,200.59
9	362,032.00	3.0410%		11,009.39	5,504.70
10	362,032.00	3.1900%		11,548.82	5,774.41
11	362,032.00	3.2910%		11,914.47	5,957.24
12	362,032.00	3.3460%		12,113.59	6,056.80
13	362,032.00	3.4160%		12,367.01	6,183.51
14	362,032.00	3.5010%		12,674.74	6,337.37
15	362,030.00	3.5590%		12,884.65	6,442.32
	5,430,478.00			144,121.25	72,060.62
Year #2 Interest Payments:
Year	Cash Flows	Int Rate		Annual Int	Semi-Int
1	0.00	1.2000%		0.00	0.00
2	362,032.00	1.3870%		5,021.38	2,510.69
3	362,032.00	1.6810%		6,085.76	3,042.88
4	362,032.00	1.9700%		7,132.03	3,566.02
5	362,032.00	2.2210%		8,040.73	4,020.37
6	362,032.00	2.4550%		8,887.89	4,443.94
7	362,032.00	2.6780%		9,695.22	4,847.61
8	362,032.00	2.8730%		10,401.18	5,200.59
9	362,032.00	3.0410%		11,009.39	5,504.70
10	362,032.00	3.1900%		11,548.82	5,774.41
11	362,032.00	3.2910%		11,914.47	5,957.24
12	362,032.00	3.3460%		12,113.59	6,056.80
13	362,032.00	3.4160%		12,367.01	6,183.51
14	362,032.00	3.5010%		12,674.74	6,337.37
15	362,030.00	3.5590%		12,884.65	6,442.32
	5,068,446.00			139,776.86	69,888.43

Why is my loan request different from the funds deposited into my bank account?

This is your net proceeds. Each NSMFC debenture passes on the costs of issuing the debenture, based proportionally on how much is borrowed. Your net proceeds are calculated by subtracting the NSMFC administration fee, issuance costs, and commissions from the loan request (based on XX cents/$100 borrowed). For budget purposes, NSMFC suggests grossing your loan request by 0.70% of 1% in order to receive the funds you actually require.

How are my net proceeds calculated?

To reconcile the amount that you requested in your Letter of Commitment, to what “net proceeds” were deposited into your municipality’s bank account, the following explanation is how the calculation is performed.

Net proceeds are calculated as the total municipal loan, less underwriting commissions, and less expenses associated with the loan. 

Administration/Reserve Fee	$0.xx/$100 borrowed
Other Issue Costs	$0.yy/$100 borrowed
Basic Issuance Costs	$0.xy/$100 borrowed
Commissions	$0.zz/$100**
Total Issue Costs	$0.ABC/$100 borrowed

**Commission fees are based on each client’s annual principal repayment,    Which is based on the syndicate fee structure. The commissions and other issue costs change from debenture-to-debenture (variable). 

Admin/Reserve Fee – The MFC Board of Directors set the upcoming fiscal rate based on projected new loan requirements, and budgeted administration expenditures of the Corporation. 

Other Issue Costs  – These costs include any additional work required by the MFC staff/CEO, and the Opinion Letter of the MFC syndicate. The Opinion Letter is a flat fee whereby the syndicate is providing its professional opinion of how the current market conditions were accessed to provide the MFC with the best pricing at that point in time. 

Underwriting Commissions – The MFC syndicate in Toronto has a set commission fee structure that is set for each annual principal retirement (ie. 15-year debenture = 15 commission calculations). This fee structure is 50% less than if a municipality were to issue a debenture on its own (hence the additional savings to municipalities). This fee is passed on proportionally to each debenture participant.

How is the “all-in” cost calculated?

The MFC “All-In” calculation is performed after your “net proceeds”, as net proceeds is the starting point. Since the MFC has up to 15 annual interest rates, based on MFC can borrow up to 15-years, it is helpful to show, and simplify, to communicate the results as an interest rate for various loan terms.

The All-In cost is a finance calculation called Internal Rate of Return (IRR). The IRR, or All-In cost of funds is performed by taking your net proceeds, as described above, and all of the semi-annual principal and interest payments. All of these cash flows are totaled so that the IRR function in Excel can perform the IRR “All-In” calculation.

In simplistic terms, it is the “one” interest rate taking into account “all” interest rates and fees (MFC’s Administrative Fee, Issue Costs, and Dealer Commissions) instead of reporting multiple rates. 

             Total of Loan P&I Payments     $(xxx,xxx.00)

             Less: Net Proceeds                    $(xxx,xxx.00)

             Net Cash Flows                           $ xxx,xxx.00

             IRR (Based on "sum")                         x.xx % 

Municipalities realize cost savings by borrowing from the NSMFC in at least three ways.What are the benefits of borrowing from the NSMFC?

1. Competitive rates
2. Pooled administration of the municipal debentures. By NSMFC issuing debentures on their behalf, municipalities avoid the costs of issuing and administering the debentures
3. Pooling of debentures to a marketable size

Who can borrow from the NSMFC?

Municipalities, municipal enterprises (with a municipal guarantee), fire departments, regional school boards, and hospitals – with the required ministerial approval.

Is it possible to borrow from the NSMFC at any other time than the spring or fall debenture issues?

Yes, the NSMFC will issue single-issue debentures. The NSMFC also offers a short-term financing program.

Can the debenture be paid off prior to maturity?

Debentures must be outstanding to maturity, which is they are not subject to redemption prior to maturity. When the NSMFC issues debentures, the Corporation is locked into the same maturity schedule including principal and interest payments as its clients. For this reason, the NSMFC does not provide for early redemption of debentures. 

What does the NSMFC offer besides debentures?

NOVA SCOTIA MUNICIPAL FINANCE CORPORATION (MFC)MFC’S Programs “At-A-Glance”

The MFC has a series of programs that you, as a municipal official, may find interesting and possibly helpful to your municipality. If you would like the MFC to come to one of your council meetings and do a presentation, please feel free to call us. MFC staff will contact you to arrange an appropriate time to present the program(s) that are of interest to you and/or your council.   

MFC Program	Program Description
Long-Term Financing	The main purpose of the NSMFC is to provide low-cost, long-term capital financing for municipalities. Typically debentures are issued twice a year, once in the spring and once in the fall.
Short-Term Financing	NSMFC offers short-term loans to clients who have completed their capital projects and are awaiting participation in the next debenture issue. The interest rate is based on the 90 day Bankers’ Acceptance plus ½ percent calculated using CDOR (Canada Dollar Overnight Rate).
Green Municipal Funds	NSMFC is partnering with the Federation of Canadian Municipalities to administer Green Municipal Funds loans to Nova Scotia municipalities.
	"FREE" program offered to our municipal clients!!!!
Debt Affordability Model“FREE” to municipal clients	The Debt Affordability Model is a long-term financial planning model that helps answer how much debt to carry, multi-year budgeting and forecasting, and analyzing revenue and expenditure options. It also takes into consideration the municipality’s future revenue and expenditure growth, as well as other variables unique to your municipality.
Capacity Building Program“FREE” to municipal clients	To support the financial management capacity of municipalities, the NSMFC sponsors conferences and offers a suite of best practices and financial planning tools.
Best Practices“FREE” to municipal clients	What are best practices? Best practices are proven and reliable techniques or methodologies. They can be simple or complex, but overall they are meant to be effective and efficient strategies for accomplishing a task. MFC’s best practices are designed to support good governance by promoting accountability, transparency, value for money, and risk management.
Mentoring Program“FREE” to municipal clients	This new program is for new Directors of Finance who lacks municipal experience.  It is the hope that this program will assist the new municipal Director of Finance become more accustom to municipal government by speaking with a retired former Director of Finance to help understand the way municipalities function and operate.  The key players to be involved in this mentoring program are: the Mentors, MFC, and DMA.
High Interest Savings Account (HISA)“NO” service or administration fees	Intended for excess funds held by a municipality (Capital Reserves, Gas Tax, & Operating Surpluses) & not to replace you current bank arrangement. Transfers to/from municipalities existing bank account are done via EFT. Interest rates are calculated based on the cumulative pool of money, thus higher interest for smaller amounts. Account are held “In Trust”, so no co-mingling of funds.