Guam Rally on Fiscal Gains Defies Puerto Rico Cuts: Muni CreditBrian Chappatta
Puerto Rico and Guam, two U.S. territories whose debt is tax-exempt nationwide, are navigating uncharted waters.
The focus in the $3.7 trillion municipal market has been on Puerto Rico, the Caribbean commonwealth of 3.6 million people that is grappling with junk ratings and about $70 billion of debt among island issuers. It is seeking to avoid restructuring its obligations after what Governor Alejandro Garcia Padilla calls “decades of fiscal irresponsibility.”
Almost halfway around the world, Guam’s finances are moving in the opposite direction. The island of 160,000 in June completed its first Comprehensive Annual Financial Report, an audited fiscal assessment, which showed a general-fund surplus and spurred a Standard & Poor’s upgrade. Guam bonds are beating the entire municipal market in 2014 for the fifth time in six years, Barclays Plc data show. In the nine years before that, the territory’s issuers outpaced all local debt just once.
In Guam, “the amount of debt is small enough and the problems in Puerto Rico are distinct enough” that investors haven’t fled territory debt broadly, said Guy Davidson, who manages $30 billion of local bonds as director of munis at AllianceBernstein Holding LP in New York. The company owns bonds issued by Guam’s waterworks, he said.
Puerto Rico’s distress has heightened awareness that interest on bonds of U.S. territories is exempt from federal, state and local taxes nationwide. The influence of Puerto Rico’s finances is amplified because 70 percent of local-debt mutual funds hold commonwealth securities, according to Morningstar Inc. By comparison, Guam issuers have about $2.4 billion of debt, data compiled by Bloomberg show.
Territorial debt is outperforming a rally in the municipal market that has pushed benchmark 10-year yields to an eight-month low of 2.56 percent, Bloomberg data show.
Bonds from Guam have gained 3 percent this year, compared with a 2.5 percent increase for the whole market, Barclays data show. Puerto Rico debt has rallied since an investor webcast last week, surging 5.2 percent in 2014. Borrowings of another U.S. territory, the Virgin Islands, have earned 2.9 percent.
In 2013, Guam debt declined 4 percent to Puerto Rico’s 20 percent plunge. The Pacific island jumped 10 percent in 2012, compared with Puerto Rico’s 2.7 percent return. Guam’s two-year win streak was the first since 2008.
While S&P dropped Puerto Rico on Feb. 4 to BB+, one step below investment grade, the New York-based company raised Guam four months ago to BB-, the highest since 2003.
“The similarities between Guam and Puerto Rico end with the fact that they’re both territories,” said Lester Carlson, public finance manager for the Guam Economic Development Authority, which oversees debt issuance. “Guam isn’t just automatically lumped in with Puerto Rico. We have stable and positive outlook trends.”
As in Puerto Rico, Guam has multiple agencies that have sold munis. Unlike Puerto Rico, where sales-tax bonds known as Cofinas are the only securities with investment grades from all three of the biggest rating companies, most Guam authorities maintain ranks above junk.
Debt from Guam’s power, waterworks, airport and education-financing authorities carry investment grades from S&P. The island’s highest-rated bonds are backed by revenue from taxing goods, services and property sales. The debt is ranked A by S&P, sixth-highest. That’s the same level as California’s general-obligation bonds.
A portion of the Guam tax-backed bonds maturing in January 2042 traded yesterday at an average of 101.2 cents on the dollar to yield 4.94 percent, Bloomberg data show. That’s about 1.06 percentage points above benchmark munis.
By comparison, Puerto Rico Cofina sales-tax debt due in August 2042 graded one step higher than the Guam securities by S&P traded yesterday at about 78 cents to yield 7.96 percent.
Similarly, Guam general obligations due in November 2039 traded Feb. 20 at 106.3 cents on the dollar to yield 5.7 percent, while Puerto Rico general obligations maturing in July 2041 exchanged hands the same day at 67.9 cents, to yield 7.88 percent.
“Guam and the Virgin Islands are rated lower, yet in some cases we have seen paper from those other U.S. territories trading well through Puerto Rico,” said Chad Farrington, head of muni research in Boston at Columbia Management Investment Advisors, which oversees about $30 billion in local debt. “You could say Puerto Rico is overdone to the cheap side.”
The five U.S. territories that have issued tax-free bonds are Puerto Rico, Guam, the Virgin Islands, American Samoa and the Northern Mariana Islands. Guam issuers sold $443 million of debt last year and the Virgin Islands Public Finance Authority borrowed $87 million, according to Bloomberg data.
The Puerto Rico Electric Power Authority, known as Prepa, issued $673 million in the only bond sale from the island in 2013. The commonwealth plans to offer $2.86 billion of general obligations next month to provide sufficient funding through June 2015.
Guam and its agencies have no plans to sell bonds “in the very near future,” Carlson said.
Tourism and U.S. military spending are the primary economic drivers on the 214-square-mile (554-square-kilometer) island, which Spain surrendered to the U.S. in 1898. Guam received a visa waiver for Russian tourists, leading to a then-record 1.3 million visitors in 2012, according to its comprehensive financial report, known as a CAFR. The island is seeking a similar agreement for China.
Guam, about 9,372 miles from Puerto Rico, is also expected to get an influx of residents next year when about 5,000 U.S. Marines and 1,300 dependents relocate to the island from Okinawa, Japan.
The island’s CAFR earned it a “Certificate of Achievement for Excellence in Financial Reporting” from the Government Finance Officers Association, said Jeffrey Esser, the group’s executive director in Chicago. It was the only territory to get the award for 2012 reporting, he said in an interview. Puerto Rico last received the distinction in 2007.
“It shows increased professionalism in a case like Guam,” Esser said. “It shows that the financial information they produced is high-quality, and it can be relied on. It’s really hard work, especially for the first time.”
Guam Governor Eddie Calvo, a 52-year-old Republican and former executive at Pepsi Cola Bottling Co. of Guam, has closed the island’s budget gap. The deficit of $336 million at the start of fiscal 2011 turned into a $30 million surplus at the end of fiscal 2012 through actions such as refinancing and quashed raises for government workers, the financial report said.
The administration’s focus is now on economic development, the report says. The territory’s unemployment rate as of September was 10 percent, the governor’s office said this month. The U.S. figure in September was 7.2 percent, while Puerto Rico’s was 14.5 percent, Labor Department data show.
S&P’s outlook on Guam is stable, indicating that tourism and the economy will probably improve and give the island a chance to boost its fiscal standing. The territory’s location leaves it vulnerable to natural disasters, and its role as a military hub makes it susceptible to defense-spending reductions, the company said.
Calvo, who took office in January 2011, is “willing to play open-face poker with everybody and he’s very pleased with the results he’s achieved,” Carlson said. “The telling of the ‘Guam story’ does result in lower yields and cost savings when we do enter the market.”