Revenue drop may drive Guam ratings further into junk territory

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S&P Global Ratings placed Guam’s already junk-rated long- and short-term debt on credit watch negative citing cash flow problems stemming from the federal tax bill.

The Guam legislature’s Office of Finance and Budget estimates that the territory's government will experience a $67 million shortfall in tax revenues over the remaining six months of the fiscal year. Gov. Eddie Calvo’s office attributed the drop in revenues from corporate and withholding taxes to the Tax Cuts and Jobs Act signed by President Trump on Dec. 22.

Calvo and the legislature have been wrangling over bills the governor introduced to try to fill the budget gap.

S&P placed Guam’s $10 million in outstanding general obligation bonds, rated BB-minus, and $177 million in COPs, rated B-plus, on negative ratings watch.

"The CreditWatch placement reflects the government's disclosure that its cash flow will be extremely constrained over the next several months, and perhaps even longer, and also reflects our view that the government's ability to meet its ongoing obligations could be impaired," said S&P Global Ratings credit analyst Paul Dyson.

Guam has a history of structural imbalance in its general fund, including recurring deficits, a very large negative general fund balance, and massive long-term liabilities. Guam had a negative $106 million general fund balance as year-end fiscal 2016, according to S&P. Audited financial statements for fiscal year-end 2017 are not yet available.

The negative CreditWatch placement reflects the possibility that these challenges will further diminish the general government's ability to meet its operational responsibilities and address its ongoing obligations, including debt payments, Dyson wrote.

“If we don't receive evidence from Guam officials addressing these rating considerations, we will likely lower the rating,” Dyson wrote.

S&P expects to resolve the credit watch following an analysis of management’s plan to deal with the territory’s current liquidity challenges.

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