Guam Boosts Triple Tax-Free Bond Sale as Puerto Rico’s Sidelined

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To Guam Governor Eddie Calvo, the only similarity between his Pacific island and Puerto Rico is that they’re both tropical U.S. territories.

The $3.6 trillion municipal-bond market appears to agree.

As Puerto Rico struggles to find investors after a fiscal crisis pushed it to default, Guam on Tuesday finished its biggest sale in six years a day ahead of schedule. Officials boosted the deal by $8 million to $413 million as investors lined up to buy securities from the island of 160,000 people, which is prospering from record tourism and an upsurge in private investment since Calvo took office in 2011.

For investors like Nuveen Asset Management and Thornburg Investment Management, which spurned Puerto Rico securities as its finances worsened, Guam offers a less risky way to own bonds with interest that’s tax-exempt nationwide. It shows in Guam’s tax-backed bonds, which priced at a top yield of 4.18 percent, compared with 15 percent on similar Puerto Rico debt.

“There are a lot of encouraging trends in Guam,” said John Miller, co-head of fixed income at Nuveen, which oversees more than $100 billion of munis, including $396 million of Guam bonds. “A lot of state funds in the marketplace have really reduced their Puerto Rico exposure, and if you’re not getting enough state paper, this deal could be a better candidate.”

Sentiment Gulf

The difference in investor sentiment between Guam and Puerto Rico mirrors the 9,372-mile (15,080-kilometer) distance between the two islands, whose bonds are exempt from federal and local income taxes in every state.

Puerto Rico has been downgraded deeper into junk status repeatedly since last year and may reveal a plan as soon as next week to delay payments on some of its $72 billion of debt. Guam has just $2.5 billion of outstanding securities and has a cap on how much it can issue, which it’s close to hitting. That prevents the runaway borrowing to pay bills that’s left Puerto Rico reeling.

The cash-strapped commonwealth has seen its market access dry up. Underwriters had initially planned a bond offering for Puerto Rico’s Aqueduct and Sewer Authority as soon as Aug. 18. It’s now considered day-to-day, meaning the timing is unclear.

Guam will use proceeds from Tuesday’s sale to refinance some higher-cost general-obligation debt it issued in 2007 and 2009, according to offering documents. The new securities, backed by a sales tax levied on businesses, have an A rating from Standard & Poor’s, the sixth highest. That’s above S&P’s BB- rating on Guam’s general obligations, which is three steps below investment grade.

‘Substantial Savings’

Some tax-exempt bonds due in 2039 priced to yield 3.91 percent, or 0.88 percentage point more than benchmark munis, Bloomberg data show. By comparison, bonds with the same maturity sold in 2009 for 7.18 percent.

“They’re swapping one type of debt for another, and the overall leverage position of the government is unchanged,” said Paul Dyson, an S&P analyst in San Francisco. “Because of the rating differential, they’re generating substantial savings.”

The business-tax collections that will repay the bonds grew to about $238 million in the fiscal year that ended in September from $222 million during the period that ended 12 months earlier, offering documents show.

Calvo, a Republican, said in an interview that the taxes will grow with the island’s economy. Guam is reliant primarily on tourism and U.S. military operations.

Seeing Stability

Guam received a record 1.34 million tourists in 2014, with hotel taxes increasing by more than 50 percent since 2010, as it attracted more travelers from South Korea, Taiwan and the U.S., offering documents show.

That offset a decline from Japan, its biggest market, as the weakening of the yen against the dollar made the island more expensive, said Calvo, who plans trade missions to China, Taiwan and other southeast Asian countries.

“What we’ve done most importantly is brought stability,” Calvo said via telephone. “The fundamentals short-, mid- and long-term in Guam to me are nothing but promising, and that’s where maybe you have some differences” from Puerto Rico.

The 212-square-mile island, less than one-fifth the size of Rhode Island, still has its challenges. After two years of surpluses, which erased a $303 million general-fund deficit, Guam’s expenses exceeded revenue by about $60 million for the year that ended in September, offering documents show.

The U.S. military’s decision to scale-back a buildup on the island will restrain its growth. What was once projected to be a $15 billion boost to the Guam economy is now just $8 billion, S&P said.

“When you have a strong economy, you see more jobs, better paying jobs, and a community feels confident,” Calvo said. “We’ve got to continue to be fiscally prudent.”

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