PROMESA Analysis Sends Guam Revenue Bonds to Junk

LOS ANGELES — The Pacific territory of Guam saw $763.3 million in revenue bonds dropped to junk based on the passage this summer of federal legislation aimed at helping Puerto Rico deal with its financial morass.

Fitch downgraded Guam's business privilege tax revenue bonds to BB from A-minus and removed the bonds from rating watch negative assigning a stable outlook at the lower rating.

The rating agency also assigned Guam an issuer default rating of BB.

Fitch then withdrew the ratings, including the underlying rating, saying the government of Guam has chosen to stop participating in the rating process.

Located closer to Asia than to the mainland U.S., Guam is the westernmost territory of the U.S.

"The downgrade is based on Fitch's assessment that the BPT bond security can no longer be rated distinct from the general operations of the government of Guam following the passage of the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA)," Fitch analysts wrote Thursday.

President Barack Obama signed PROMESA into law June 30. It created a seven-member oversight board that has the power to require balanced budgets and fiscal plans, as well as to file debt restructuring petitions on behalf of Puerto Rico and its entities in a federal district court as a last resort, if voluntary negotiations fail.

While PROMESA does not apply to the government of Guam, Fitch analysts said they believe an "avenue has been created for the federal government to adopt future legislation allowing for a restructuring of Guam-backed debt even though Guam is not eligible to file for bankruptcy under current federal law."

PROMESA fundamentally altered the premise used to rate certain tax-backed debt issued by territorial governments, Fitch said.

The BPT bonds are special limited obligations of the government of Guam secured by a lien on 3% of the 4% business privilege tax levied on goods and services. The BPT debt structure was devised to create an investment-grade debt structure insulated from the territory's junk-level general obligation bond rating.

Fitch also cited Guam's very long trend of weak financial operations and high debt levels for the downgrades.

Though the territory has an economy more diverse than other territories, and continues to experience economic growth, Fitch wrote, it has been unable to reach and sustain a structurally balanced budget.
The BPT is a broad, diversified tax, levied on goods and services, which tracks the Guam economy -- and revenues are expected to grow above the level of inflation, Fitch said.

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