Downgrade based on assessment that the bond ‘security can no longer be rated distinct from the general operations of the government of Guam’

HAGÅTÑA, Guam (Pacific Daily News, December 25, 2016) – The government of Guam’s outstanding Business Privilege Tax bonds have been downgraded by Fitch Ratings from A- to BB, the governor’s office announced Friday.

The Calvo administration attributed the change to the federal Puerto Rico Oversight, Management and Economic Stability Act, or PROMESA, which was signed into law June 30, 2016. The act was introduced to allow Puerto Rico to restructure its debt and halt litigation in the event of default through the establishment of a federally appointed oversight board. The board also is responsible for oversight and monitoring implementation of sustainable budgets.


According to a press release, Gov. Eddie Calvo, his fiscal team and the Guam Economic Development Authority met with Fitch on two separate occasions to make the case that Guam didn’t fall under PROMESA.

Fitch Ratings acknowledged that “PROMESA does not apply to the government of Guam.” It said the downgrade was based on the organization’s “assessment that the BPT bond security can no longer be rated distinct from the general operations of the government of Guam.”

As a result, Fitch Ratings “believes 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.” Therefore, Fitch Ratings “analyzed the general credit quality of Guam” and assigned the rating on that basis.

Calvo’s office has asked the ratings be withdrawn, leading Fitch Ratings to state that “as the government of Guam has chosen to stop participating in the rating process,” the company will “no longer have sufficient information to maintain the ratings” and will therefore no longer provide analytical coverage of GovGuam’s Business Privilege Tax bonds and Issuer Default Rating.

The governor’s office said the rating change doesn’t impact the cost of Guam’s outstanding debt, and that because Guam won’t seek Fitch ratings in the future, the effect on future financing will be minimal.

In its analysis of Guam’s financial strength, Fitch stated the current BB Issuer Default Rating “reflects the very long trend of weak financial operations and high debt levels,” which has led to Guam’s inability “to reach and sustain a structurally balanced budget.”

The analysis noted solid growth in overall revenue growth, mainly due to U.S. military investment and tourism, and predicts that Guam could absorb a decline in revenues in a moderate recession scenario.

However, due to Guam’s “sizable outstanding debt obligations and the unfunded pension liability for the closed defined benefit plan,” Fitch Ratings assessed Guam as having “limited gap closing capacity and would likely experience fiscal distress in a moderate downturn.” The analysis further noted Guam’s “difficulty reaching budgetary balance even during this extended period of economic expansion.”

Fitch’s analysis noted the current administration’s attempts to reverse a 20-year history of operating at a deficit through a plan to shrink the operating deficit by controlling expenditures, improving revenue estimation and collection and using debt issuance to pay overdue tax refunds and other General Fund expenses that totaled $340 million.

The analysis concluded progress was made between fiscal 2011 and fiscal 2014, but that “ultimate budget balance has not been reached,” while the negative fund balance has grown again to $120 million at the end of fiscal 2015.

In a statement, the governor’s office noted Guam ratings have been upgraded by ratings agencies 10 times since January 2011, and the recent Fitch downgrade is the only downgrade during that time period. The statement said Guam was only re-evaluated because Congress had demonstrated through PROMESA willingness to alter laws allowing a U.S. territory to restructure debt, and that “the rating had nothing to do with a change in Guam’s credit strength or any factor within Guam’s control.”

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