GovGuam bond rating upgrade supported by military construction, tourism

Moody’s Investor Service upgraded the government of Guam's issuer rating along with various bonds and the governor is hoping the new rating will entice more investors.

The issuer rating, general obligation bonds, Hotel Occupancy Tax bonds, and Business Privilege Tax bonds ratings are now investment grade Baa3 from Ba1. Moody's has also upgraded Guam's Certificates of Participation rating to Ba1 from Ba2, according to Moody’s Jan. 25 press release.

At the end of fiscal 2022, Guam had $23.6 million of GO bonds, $58.9 million of HOT bonds, $273.1 million of rated BPT bonds and $61.3 million of rated COPs outstanding. The outlook has been revised to stable from positive at the new rating level.

“The upgrade of Guam's issuer rating is driven by significant improvement in the government's financial position bolstered by federal government support and substantial military construction activity, despite depressed tourism levels,” according to Moody’s. “The outlook revision to stable reflects Guam's continued strong revenue and budget performance supported by military construction activity and slow recovery of the territory's tourism industry.”

Gov. Lourdes A. Leon Guerrero, in a special statement on Jan. 25, explained what this means for Guam.

“That means greater opportunities for investors. That means we can go out now into the capital market with low interest rates for our investors. That means we can entice more investors now to invest into our community,” she said. She and her fiscal team met with Moody’s representatives earlier this month.

“We made a presentation to Moody's about the strength of our government finances, about the fact that we created a rainy-day fund, about the fact that we worked very closely with military and federal government, one of the biggest spenders of our economy. As a result, I learned last night that we are now upgraded from a non-investment grade to an investment grade,” she said.

The investment grade rate means lower bond financing interest rates for future issues as additional investors–who can only purchase investment grade bonds–will now be able to participate and compete for Government of Guam bonds.

Lt. Gov. Joshua F. Tenorio said the general fund has had surpluses since FY2019.

According to Moody's, Guam's Baa3 issuer rating reflects the territory's strengthened financial position, substantial federal government support and significant military construction activity on the island, which provides stability to government finances and the territory's economy.

"Guam's available fund balance reached 13.9% of own-source revenue at the end of fiscal 2022 and will continue to increase through fiscal 2024," according to Moody's press release.

The investment rating agency also noted weaknesses.

Guam's strengths are "balanced by a small and concentrated economy that is heavily reliant on international tourism, low resident income levels and very high total long-term liabilities and fixed costs."

"The territory also faces above-average environmental exposures, especially typhoon risk and sea level rise, reflected in its E-4 environmental issuer profile score," according to Moody's.

Moody's also reported:
• Guam's Baa3 general obligation rating is the same as the territory's issuer rating given the government's pledge of its full faith and credit and broad revenue base to repay the bonds.

• The Baa3 rating on Guam's HOT bonds factors in strong maximum annual debt service coverage of 3.1 times in fiscal 2022 provided by a narrow pledge of hotel occupancy taxes; sound legal provisions including a 1.8 times additional bonds test, cash-funded debt service reserve, and 1.25 times rate covenant; and the territory's small and highly tourism-dependent economy. The rating is the same as Guam's issuer rating, reflecting the overlapping credit attributes of the HOT bonds with Guam's general economic profile and revenue performance.

• The Baa3 rating on Guam's BPT bonds factors in strong maximum debt service coverage of 3.5 times in fiscal 2022 provided by a broad pledge of business privilege taxes; sound legal provisions including a strong 3.0 times additional bonds test; and the territory's small and highly tourism-dependent economy. The rating is the same as Guam's issuer rating, reflecting the overlapping credit attributes of the BPT bonds with Guam's general economic profile and revenue performance.

• The Ba1 COPs rating, one notch below Guam's issuer rating, reflects the contingent nature of the annually renewable lease-backed obligation and the more essential nature of the leased asset - one of six high schools in Guam's K-12 education system.

Moody's also issued a stable outlook. This reflects the likelihood that Guam's available fund balance will remain over 10% of own-source revenue and liquidity will remain strong because of consistently solid revenue and budget performance. The government's financial position will continue to improve over the next fiscal year as tourism slowly recovers and military construction activity continues on the island. mbj