While state and municipal governments in the U.S. are wrestling with which voice is loudest when calling for government funds-backed ABS deals, at least one Canadian province has begun to test the waters.

Toronto-based Scotia Capital Markets debuted its Borealis Infrastructure Trust last week, a special purpose trust set up to securitize cash flows from infrastructure programs across Canada, using a master trust platform.

The first deal, a C$162 million ($110 million) issue, will be used for the construction of 15 new schools in the Province of Nova Scotia, and the continued operation of one other newly-built school.

The issuer, Borealis, is a subsidiary of pension fund giant Ontario Municipal Employees Retirement System (OMERS). Funds like OMERS have become big players in the Canadian market, and similar government employee pensions funds also have mandates to invest in infrastructure works, sponsored by municipal, provincial and federal governments in Canada.

"The trust vehicle is there to provide debt leverage for these deals," said Philip Lieberman, associate director, investment banking, at Scotia Capital.

The Borealis bonds carried a 6.35% coupon and priced at 75.5 basis points over the curve: a "fat Nova Scotia spread" said Lieberman. The deal, rated at A- by Standard & Poor's and Canadian Bond Rating Service, the same rating as the Province of Nova Scotia, traded at Nova Scotia's 50.5 basis point spread over the Canadian Treasury curve, plus an additional 25 basis points for the structure. "It's not a plain vanilla Nova Scotia bond," Lieberman said about the spread.

Agreements with the government make the rental revenue stream "unconditional and irrevocable," he added, thus the comparison to provincial bonds.

These public-private partnerships are controversial, especially in the "have-not" provinces - every province except Ontario, British Columbia and Alberta that accepts on balance more transfer payments from the federal government than they pay in through tax revenues. A recent election in Nova Scotia made the school deal a sticking point, with some groups not wanting private intrusion in what was once only a government area.

But Lieberman said this trust is a signal of things to come, since commitment to deficit reduction has forced provincial governments to look elsewhere than taxation for funding. "It'll be explosive in the next decade," he said of these deals, citing energy projects, water and sewer construction and toll roads as potential infrastructure assets to be securitized. - TC

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