SAN FRANCISCO — Guam will hit the market next week to sell $235 million of new bonds to pay off a backlog of overdue tax refunds.
Officials said they developed a new bond structure backed by the U.S. territory’s business privilege tax to obtain an investment-grade rating in a bid to grab the best yields possible for the triple-tax-exempt offering.
“We structured this credit to achieve strong A-category ratings and we think the BPT bonds will prove to be a great long-term value for investors,” said Karl Pangelinan, administrator for the Guam Economic Development Authority.
The bonds will be backed by three percentage points of the existing 4% tax on business receipts.
“It’s similar to, but more expansive than, a sales tax,” said Lester Carlson Jr., business development and marketing manager for the GEDA. Standard & Poor’s rates the business privilege-tax revenue bonds A with a stable outlook and Fitch Ratings gives them an A-minus with a stable outlook. Guam’s general obligation bonds are rated B-plus by S&P.
The deal is set to price on Nov. 15. Barclays Capital is the senior manager and Orrick, Herrington & Sutcliffe LLP is bond counsel.
Located closer to Asia than to the U.S. mainland, the 212-square-mile island has a population of 160,000 with an economy tied mostly to tourism from Asia and the U.S. military. The island’s gross domestic product rose throughout the recession to $4.5 billion in 2009.
The money raised from the bond sale will be used to pay off liabilities accrued in past budgets, including $198 million of unpaid income tax refunds.
The BPT bonds will have a debt-service coverage ratio of more than eight times, said S&P’s Paul Dyson. “Ratings upside over the next two years is possible, to the extent annual BPT revenues demonstrate greater resilience through economic cycles,” he said. “Given currently very strong coverage, we do not expect to lower the rating over the next two years.”
The BPT tax makes up more than 31% of Guam’s general fund revenues, while the income tax is about 60%.
S&P also said the island’s exposure to severe weather and economic events adds risk to the BPT backing because revenues depend heavily on Asian tourism.
Standard & Poor’s noted tax revenues peaked at $184 million in 1997 and fell 35% over the next five years due to the combined impact of the Asian financial crisis, typhoons, and the Sept. 11 terrorist attacks. The SARS epidemic also took a toll starting in 2003.
Most recently, Guam took a hit from the March earthquake and tsunami in Japan, which is the largest source of tourists — more than 75% of the 1.17 million visitors in 2010. But the island has already recovered back to pre-March visitor levels.
“The rebound was actually pretty quick, compared to SARS,” Carlson said.
Guam is also trying to broaden its appeal to tourists in other countries. It is lobbying for special rules to allow visitors from mainland China and Russia to visit the island without a cumbersome visa process. Officials noted that the Northern Mariana Islands, a commonwealth in a political union with the United States, enjoys less difficult visa rules.
Fitch’s Karen Krop said in a report this month that Guam has a history of general fund deficits, though she noted the current administration is taking steps to reach a structurally balanced budget. “Borrowing, along with cost cutting and non-tax revenue enhancement initiatives, are just a few of the components of our fiscal stabilization plan,” said Bernadette Artero, chief fiscal advisor to Gov. Eddie Calvo.
Another boon to its economy would be an expansion of the presence of the U.S. military, which values Guam’s strategic position relative to Asian powers.
Carlson said the assumptions built into the bond structure are based on the territory’s current economy and population.
The U.S. Department of Defense is pursuing plans to relocate 8,000 Marines and dependents to Guam from the Japanese island of Okinawa. Guam is now home to more than 6,000 active military personnel and around 8,800 dependents.
