Fitch Rates Guam's $405MM BPT Bonds 'A-'; Outlook Stable

NEW YORK--()--Fitch Ratings has assigned an 'A-' rating to the following Government of Guam business privilege tax (BPT) refunding bonds:

--$404.865 million series 2015D.

The bonds are expected to sell via negotiation the week of Aug. 24, 2015.

In addition, Fitch affirms the 'A-' rating on outstanding BPT bonds:

--$245 million series 2011A;

--$108.7 million series 2012B;

--$17.34 million series 2013C.

The Rating Outlook is Stable.

SECURITY

The bonds are special limited obligations of the government of Guam secured by a lien of 3% out of the 4% general BPT levied on goods and services.

KEY RATING DRIVERS

STRUCTURE PROTECTS BONDHOLDERS: The rating reflects a structure and revenue pledge that insulates the bonds from Guam's somewhat weak general fund operations. Bonds have a first lien on pledged BPT revenues, there is strong non-impairment language, and Guam cannot file for bankruptcy protection.

STRONG DEBT SERVICE COVERAGE FROM BROAD BASED TAX STREAM: The BPT base is broad and diversified and revenues, although somewhat cyclical, have been growing. Pledged revenues in fiscal 2014 provide 3.2x coverage of maximum annual debt service (MADS) and bondholders are protected by an additional bonds test requiring 3x MADS coverage.

ECONOMY TIED TO TOURISM AND U.S. MILITARY: Although the Guam economy is relatively small and is heavily reliant on tourism, some balance is provided by the strategic importance of Guam to U.S. military operations in the Pacific. Although expansion has been delayed, Guam officials continue to expect the military presence on Guam to increase over the next 10 years.

RATING SENSITIVITIES

REDUCED REVENUES AND NARROWER COVERAGE: The rating is sensitive to a reduction in BPT revenues that causes a significant narrowing of debt service coverage.

CREDIT PROFILE

The bonds are secured by a portion of the Government of Guam's general BPT, a broad-based and diversified tax on goods and services that primarily includes taxes on gross receipts.

SEPARATION FROM GENERAL OPERATIONS

Legal provisions are strong and provide sufficient insulation from general fund operations to result in a rating on the BPT bonds that is significantly higher than would be the case for a general obligation (GO) pledge. The bonds' first lien on pledged revenues, 3% of the 4% BPT, is established upon collection of the tax regardless of whether or not the cash has been transferred to the trustee. The BPT is collected and held outside of the general fund and transferred on a weekly basis to the trustee.

There is strong non-impairment language in which the government has covenanted that it will not reduce the rate of levy and collection of the pledged BPT below 3% nor reduce the services or products to which the BPT is applied, nor adjust upward any exemption or exclusion or otherwise impair the pledged BPT. Other legal provisions include a strong 3x additional bonds test based on historical revenues and a flow of funds which results in the debt service fund being fully funded three months prior to the debt service payment date.

SOLID DEBT SERVICE COVERAGE

The tax paying base is not highly concentrated as it is paid by a wide range of small, medium, and large businesses. Almost half of the tax base (43%) is derived from retail trade with the service sector contributing another 22%. Tax revenues are somewhat volatile and collections have fluctuated following typhoons and other natural disasters, health epidemics in Asia, and worldwide economic conditions. Tax revenues have generally been growing since experiencing large declines in the middle of the last decade and experienced only a minor drop-off (1.7% in 2009) during the most recent recession.

Fiscal 2014 receipts totaled $238 million, up 7.5% year-over-year. These revenues provide satisfactory coverage of projected debt service requirements at 3.2x coverage of MADS. It has been Fitch's expectation that Guam would leverage the revenue stream up to the additional bonds test of 3x when it had capacity under its debt limitation. The current offering, instead, refunds most outstanding GO debt of the Government of Guam with the higher rated BPT credit, with minimal impact relative to the debt limitation. The substitution of BPT bonds for GO bonds is expected to save the government approximately $2 million annually in debt service costs.

ECONOMY LINKED TO TOURISM AND MILITARY

Located closer to Asia than to the mainland United States, Guam is the westernmost territory of the U.S. and, although the economy is largely tourism based, the U.S. military is a stabilizing presence. There are approximately 6,000 active military personnel and 6,600 military dependents on Guam (out of a total population of 159,538), a number that is projected to grow over the next 10 years. Although the planned relocation of the Third Marine Expeditionary Force from Okinawa, Japan to Guam has been delayed and reduced from earlier forecasts, Guam officials still expect approximately 5,000 troops to be relocated to Guam.

Tourism is a strong a growing part of Guam's economy. Guam receives over 1.34 million visitor arrivals annually, with approximately 62% derived from Japan; this proportion has declined with growth in other markets. The government is working to develop the visitor base, having successfully expanded a visa waiver program to include Russia and is working to add mainland China, an effort that if successful has the potential to significantly increase income to the island. Given its location and small size, Guam is susceptible to natural disasters that can also affect its tourism-based economy.

EFFORTS TO BALANCE BUDGET

Since the current administration took office in 2011, it has implemented a fiscal stabilization plan based on spending controls, improved revenue estimation and collection, and bond issuance to both pay overdue and accumulated tax refunds as well as to provide budgetary relief. BPT backed bonds were issued as part of this plan to finance liabilities that had accrued to past general fund budgets. Guam has a history of weak general fund operations, operating deficits, a large end-of-year fund deficit, and GAAP deficits. Guam issued deficit funding GO bonds in fiscal 2009.

With gradual fiscal improvement since the plan was put into place, the government reports that the budget was close to balance in fiscal 2014 and that it issued tax refunds without any need for external financing. A balanced budget was enacted for fiscal 2015, which began Oct. 1, 2014, that funds scheduled pay raises that were re-instated in fiscal 2014. Revenues are reportedly meeting forecast and expenditures controls remain in place.

HIGH DEBT LEVELS

Guam's debt levels are quite high with tax supported debt equal to approximately 56% of personal income and $7,147 per capita. Guam is effectively at the debt limit set in the Organic Act, the U.S. law under which it operates, which limits public indebtedness to 10% of aggregate tax valuation of property in Guam. The Guam Supreme Court has interpreted aggregate tax valuation to mean assessed value and statute sets assessed value to 100% of appraised value. Guam expects an increase in its debt limit based on a recent property revaluation.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria

Tax-Supported Rating Criteria (pub. 14 Aug 2012)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015

U.S. State Government Tax-Supported Rating Criteria (pub. 14 Aug 2012)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686033

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=989608

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=989608

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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Contacts

Fitch Ratings
Primary Analyst
Karen Krop
Senior Director
+1-212-908-0661
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Marcy Block
Senior Director
+1-212-908-0239
or
Committee Chairperson
Douglas Offerman
Senior Director
+1-212-908-0889
or
Media Relations:
Sandro Scenga, +1-212-908-0278
sandro.scenga@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Karen Krop
Senior Director
+1-212-908-0661
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Marcy Block
Senior Director
+1-212-908-0239
or
Committee Chairperson
Douglas Offerman
Senior Director
+1-212-908-0889
or
Media Relations:
Sandro Scenga, +1-212-908-0278
sandro.scenga@fitchratings.com