Municipal bonds issued by the Government of Guam, a U.S. territory, have benefitted from the financial travails of the Commonwealth of Puerto Rico. As is the case with Puerto Rico debt, Guam bondholders enjoy the benefit of the triple tax exemption of municipal bonds issued by U.S. territories. The triple tax exemption has been a valuable tool for investors, particularly in states with high income tax rates, and as Puerto Rico’s finances have deteriorated, investors in territorial debt have found a relatively safe haven in Guam bonds.
Unlike Puerto Rico bonds, the credit quality of Guam bonds has been relatively stable. While Puerto Rico has defaulted on some of its debt obligations, has outstanding proposals to restructure its bonds, and is seeking authorization to utilize Chapter 9 bankruptcy from Congress, Guam’s debt profile has improved and its leaders have made clear that they are not interested in obtaining bankruptcy authority. Guam Governor Eddie Calvo recently stated that “Guam has no need nor desire to look at any type of backdoor such as bankruptcy protection,” and that Guam is “ensuring the sanctity of these investments for investors.” Guam has also taken actions to improve its credit quality, such as by setting rates at sufficient levels to generate 1.75x coverage on Guam Waterworks Authority Water and Wastewater Bonds that were issued this week (rated Baa2/A-/BBB- by Moody’s, S&P and Fitch, respectively).
While Guam’s population, at about 165,000, is a fraction of the population of Puerto Rico, and its location in the western Pacific Ocean makes it more remote, it has one significant credit advantage over the commonwealth. That remote location also puts Guam in a key strategic position for the U.S. military, given its proximity to eastern Asia. The military presence has provided economic stability for the territory, and Guam has been able to leverage revenues generated from federal and military personnel to back various types of investment grade dedicated tax bonds (primarily involving taxes on goods and services and specified income taxes). Although those bonds have strong coverage levels and good bondholder protections, they do carry additional risks to bondholders relative to dedicated tax bonds issued by states, as Guam’s GO debt is relatively weak. While Guam has taken steps to strengthen its balance sheet, its GO bonds have less than investment grade ratings (BB- by S&P). We do not expect Guam to pursue the drastic actions that Puerto Rico has taken to address its financial struggles, but the lower credit quality of Guam’s general fund is a factor in evaluating Guam’s higher rated dedicated tax bonds.
Sources: Bloomberg News, Fitch Ratings, Standard & Poor’s