Debt Crisis In Puerto Rico Could Have Ramifications For Guam Borrowing

Fitch Ratings issues ‘rating watch’ with the possibility of credit downgrade

By Gaynor Dumat-ol Daleno

HAGÅTÑA, Guam (Pacific Daily News, July 8, 2016) – Puerto Rico’s financial hardships have cast a shadow on the government of Guam’s image in the bond market, where the local government goes to borrow money.

Credit-rating firm Fitch Ratings on Wednesday, July 6 announced it has placed the government of Guam and the U.S. Virgin Islands on a rating watch with a possible negative development, as a result of the new law Congress enacted on June 30 to address Puerto Rico’s financial distress. A rating watch with a negative outlook indicates a potential downgrade of an entity’s credit rating, according to Fitch.

A credit rating for GovGuam is the equivalent of a consumer’s credit score.

If a credit-rating downgrade occurs, it could increase GovGuam’s cost of new borrowing or refinancing, due to a potentially higher interest rate.

Two proposed laws pending in the Guam Legislature would create new debt for Guam Memorial Hospital and refinance existing bond debt for GovGuam. The borrowing and refinancing could be worth up to $425 million.

Fitch’s action doesn’t affect existing GovGuam bond debt, said Jay Rojas, Guam Economic Development Authority administrator.

“We remain at an investment-grade bond rating of A-,” Rojas said in a press release while meeting with bond advisers in San Francisco.

GovGuam owes bond investors more than $1 billion, according to Public Auditor Doris Flores Brooks in a report earlier this week.

GovGuam had a total of $1.4 billion in long-term debt, according to a financial analysis, called Performeter, which the federal government released last year. That $1.4 billion placed a debt burden of $9,051 for every Guam resident, which is considered high when compared to other U.S. territories, according to the Performeter report.

Rojas’ meetings are meant to consider “options to mitigate the effects of the passage” of the Puerto Rico relief bill for Guam, according to a GEDA press release.

“This Rating Watch Negative action is a reaction to the U.S. government’s passage of the bill and has nothing to do with the Government of Guam’s financial strength,” Rojas said.

Fitch, in placing Guam and the U.S. Virgin Islands under a rating watch, stated the law designed to help Puerto Rico deal with mounting debts also could open a mechanism for territories to file for bankruptcy under Chapter 9 of the Bankruptcy Code.

Previously, territories were assumed to be like states, which would not make themselves subject to bankruptcy proceedings, according to Fitch.

GEDA on Thursday re-issued Gov. Eddie Calvo’s assurances to the bond market in February, reported in Bloomberg News, that when it comes to debts, “Guam has no need, nor desire, to look at any type of backdoor, such as bankruptcy protection.”

Chapter 9 of the federal Bankruptcy Code allows a financially distressed municipality a shield from its creditors while it develops and negotiates a plan for adjusting its debts. Options for municipalities under Chapter 9 include stretching the repayment over a longer period, reducing the amount of principal or interest, or refinancing the debt by obtaining a new loan, according to

Detroit, Michigan’s bankruptcy was filed through Chapter 9.

Rojas also said he’s meeting with investors to assure them of “the strength of Guam’s outlook.”

Fitch last year did indicate concern that Guam’s debt levels were high and nearing its limit.

Guam’s elected public auditor recently stated that, out of GovGuam’s billion-dollar long-term bond debts, $766 million was incurred because the local government borrowed money to spend beyond its means, or through what she called “deficit spending.”

In addition to debts owed to bond creditors, GovGuam also owes $1.3 billion in long-term pension fund liability, of which $846 million would be paid out of GovGuam’s main purse, the General Fund, according to the public auditor.

Congress’ enactment of the Puerto Rico Oversight, Management, and Economic Stability Act, or “PROMESA,” demonstrates the capacity of the federal government to adopt legislation controlling territorial bankruptcy, in much the same manner that a state might do to control the ability of municipalities to seek bankruptcy protection, according to Fitch.

Pacific Daily News
Copyright © 2016 Guam Pacific Daily News. All Rights Reserved

Rate this article: 
No votes yet

Add new comment