LOS ANGELES - The U.S. territories of Guam and the U.S. Virgin Islands won't get a ratings change after the Puerto Rico Oversight, Management, and Economic Stability Act was signed into law, S&P Global Ratings said this week.
The S&P announcement Monday stands in contrast to action taken by Fitch Ratings last week, which put both territories on rating watch negative, citing the implications of the PROMESA legislation for the other territories.
Moody's Investors Service downgraded the Virgin Islands' rum tax bonds by six notches on June 30, but that decision was unrelated to the PROMESA legislation, which provides Puerto Rico with some protections similar to those established under the federal bankruptcy code, including the ability to impose an automatic stay on creditor actions and provide an orderly forum for negotiations. PROMESA also allows for other territories such as Guam and the U.S. Virgin Islands to utilize the law if they request the establishment of oversight boards.
While S&P does see the act as setting a potentially risky precedent for bondholders, the rating agency said it will not take rating action based on PROMESA but rather on credit fundamentals. The other island territories, though facing some of their own financial troubles, have become more attractive to investors looking for triple exemption from state, federal and municipal taxes. U.S. Virgin Islands officials said this week that they plan to sell a new $1 billion bond issue.
"In our opinion PROMESA poses risks to bondholders of other territories covered by the Act because it may open the door for those territories to follow Puerto Rico's path in establishing an oversight board, especially if or when those territories experience heightened fiscal distress," S&P said. "In our view, given the direct link between worsening fiscal distress and the likelihood of other territories' seeking to establish their own oversight boards, our ratings continue to focus on predefault credit fundamentals, including the ongoing ability to pay obligations in full and on time. Consistent with this view, S&P Global Ratings lowered the ratings on various Puerto Rico-related bonds in several instances over the past four years to reflect this greater likelihood of default, long before PROMESA was enacted or even proposed. We note that while the existence of restructuring regimes such as PROMESA or Chapter 9 might be helpful to establishing an orderly restructuring of debt, their absence does not prevent insolvency or debt default."
Both Guam and the Virgin Islands issue debt from multiple different authorities, with different repayment pledges.
