Puerto Rico debt relief casts shade on Guam

Fitch Ratings placed the following ratings of the U.S. Virgin Islands (USVI) Public Finance Authority (VIPFA) and the Government of Guam (Guam) on Rating Watch Negative. This action was taken for the following reason:

“The rating actions follow the enactment of S.2328, an act known as ‘Puerto Rico Oversight, Management, and Economic Stability Act’ or ‘PROMESA’ on June 30, 2016. PROMESA fundamentally alters the premises used to rate certain tax backed debt issued by territorial governments distinct from and above the territory’s issuer default rating (IDR).”

It is important to note that this Watch does not effect Guam’s bond ratings. Since the discussions on the Puerto Rico debt relief began, Governor Calvo has clearly expressed to bondholders and investors that Guam will not request or consent to an oversight board under PROMESA.

“When it comes to the policymakers in Washington, D.C., dealing with the Puerto Rico situation, I’ve made it very clear: Guam has no need nor desire to look at any type of backdoor such as bankruptcy protection,” said Gov. Eddie Calvo in a February 2016 interview with Bloomberg News. And Gov. Calvo’s staunch opposition against any bailout of the commitment Guam has made with bondholders was again reiterated.

Investors who invest in bonds issued by the Government of Guam are triple tax-exempt. This offers the investor exemption from local, state, and federal taxes on the interest they earn with a purchase of Guam bonds.

“Our goal is to ensure the sanctity of these investments for investors”, said Jay Rojas, administrator for the Guam Economic Development Authority. “Gov. Calvo has made this clear.

“Our ratings should not be affected by the situation in another jurisdiction. GEDA has built strong relationships with investors of Guam Bonds and can ensure that our ability to cover the required annual debt service on our bonds remains strong,” said Rojas.

“Fitch placing the Government of Guam on a Rating Watch Negative doesn’t effect Guam’s outstanding bonds. We remain at an investment grade bond rating of A-,” added Rojas.

“This Rating Watch Negative action is a reaction to the United States Government’s passage of the bill and has nothing to do with the Government of Guam’s financial strength.”

Rojas is currently in San Francisco meeting with Underwriters and Bond Counsel reviewing options to mitigate the effects of the passage of the PROMESA bill and will continue to meet with investors assuring the strength of Guam’s outlook.

For more information, please contact Jay Rojas, GEDA Administrator via email at jrojas@investguam.com.

On June 30, 2016, the President signed into law the Puerto Rico Oversight, Management, and Economic Stability Act (the “Act”). Despite its name, the Act applies to other United States territories, as well as Puerto Rico. The Act defines a “territory” as (A) Puerto Rico, (B) Guam, (C) American Samoa, (D) the Commonwealth of the Northern Mariana Islands, and (E) the United States Virgin Islands. Under the Act, an “oversight board” can be established for a territory that is in financial distress. While the Act establishes an oversight board for Puerto Rico, it is not entirely clear how an oversight board would be established for any other territory.

The legislature or governor of a territory can request the establishment of an oversight board, but action by Congress or the President may be required before an oversight board can be established for any other territory. The Act provides that the purpose of an oversight board is to provide a method for the territory to achieve fiscal responsibility and access to the capital markets.

While the provisions of the Act regarding adjustment of debts include some of the provisions found in the Bankruptcy Code, the provisions of the Act regarding adjustment of debts are not the same as the provisions of the Bankruptcy Code.

The Act also establishes an out-of-court process, pursuant to which bondholders and the territory can agree, under the supervision of the oversight board, to modify the terms of bonds issued by the territory. (PR)