OREANDA-NEWS. Fitch Ratings affirms the 'A-' rating on the Government of Guam's Business Privilege Tax (BPT) bonds as follows:

--\$245 million series 2011A;
--\$108.7 million series 2012B;
--\$17.34 million series 2013C.

The Rating Outlook is Stable.

SECURITY

The bonds are special limited obligations of the government of Guam secured by a lien on 3% of the 4% BPT levied on goods and services.

KEY RATING DRIVERS

STRUCTURE PROTECTS BONDHOLDERS: The rating reflects a structure and revenue pledge that insulates the bonds from Guam's somewhat weak general fund operations. Bonds have a first lien on pledged BPT revenues, there is strong non-impairment language, and Guam cannot file for bankruptcy protection.

STRONG DEBT SERVICE COVERAGE FROM BROAD BASED TAX STREAM: The BPT base is broad and diversified revenues, although somewhat cyclical, have been growing. Pledged revenues in fiscal 2014 provide 6.1x coverage of maximum annual debt service (MADS) and bondholders are protected by an additional bonds test requiring 3x MADS coverage.

ECONOMY TIED TO TOURISM AND U.S. MILITARY: Although the Guam economy is relatively small and is heavily reliant on tourism, some balance is provided by the strategic importance of Guam to U.S. military operations in the Pacific. Although expansion has been delayed, Guam officials continue to expect the military presence on Guam to increase over the next 10 years.

RATING SENSITIVITIES

REDUCED REVENUES AND NARROWER COVERAGE: The rating is sensitive to a reduction in BPT revenues that causes a significant narrowing of debt service coverage.

CREDIT PROFILE

The bonds are secured by a portion of the Government of Guam's BPT, a broad-based and diversified tax on goods and services, including taxes on gross receipts, alcoholic beverages, liquid fuel, tobacco and autos.

SEPARATION FROM GENERAL OPERATIONS
Legal provisions are strong and provide sufficient insulation from general fund operations to result in a rating on the BPT bonds that is significantly higher than would be the case for a general obligation (GO) pledge. The bonds' first lien on pledged revenues, 3% of the 4% BPT, is established upon collection of the tax regardless of whether or not the cash has been transferred to the trustee. The BPT is collected and held outside of the general fund and transferred on a weekly basis to the trustee. There is strong non-impairment language in which the government has covenanted that it will not reduce the rate of levy and collection of the pledged BPT below 3% nor reduce the services or products to which the BPT is applied, nor adjust upward any exemption or exclusion or otherwise impair the pledged BPT. Other legal provisions include a strong 3x additional bonds test based on historical revenues and a flow of funds which results in the debt service fund being fully funded three months prior to the debt service payment date.

SOLID DEBT SERVICE COVERAGE
The tax paying base is not highly concentrated as it is paid by a wide range of small, medium, and large businesses. Almost half of the tax base (43%) is derived from retail trade with the service sector contributing another 22%. Tax revenues are somewhat volatile and collections have fluctuated following typhoons and other natural disasters, as well as health epidemics in Asia, and worldwide economic conditions. Tax revenues have generally been growing since experiencing large declines in the middle of the last decade and experienced only a minor drop-off (1.7% in 2009) during the recent recession.

Fiscal 2014 (unaudited) receipts totaled \$235 million, up 6.1% year-over-year. These revenues provide ample coverage of projected debt service requirements at 6.1x coverage of MADS. It is Fitch's expectation that Guam will leverage the revenue stream up to the additional bonds test of 3x when it has capacity under its debt limitation.

ECONOMY LINKED TO TOURISM AND MILITARY
Located closer to Asia than to the mainland United States, Guam is the westernmost territory of the U.S. and, although the economy is largely tourism based, the U.S. military is a stabilizing presence. There are approximately 5,997 active military personnel and 7,472 military dependents on Guam (out of a total population of 159,538), a number that is projected to grow over the next 10 years. Although the planned relocation of the Third Marine Expeditionary Force from Okinawa, Japan to Guam has been delayed and reduced from earlier forecasts, Guam officials still expect approximately 5,000 troops to be relocated to Guam.

Tourism is a strong and growing part of Guam's economy. Guam receives over 1.34 million visitor arrivals annually, with approximately 61% derived from Japan; this proportion has declined with growth in other markets. The government is working to develop the visitor base, having successfully expanded a visa waiver program to include Russia and is working to add mainland China, an effort that if successful has the potential to significantly increase income to the island. Given its location and small size, Guam is susceptible to natural disasters that can also impact its tourism-based economy. Since 2008 tourism has been negatively affected by the worldwide recession, the spike in H1N1 virus in Japan in 2009, and the tsunami in Japan in March 2011.

EFFORTS TO BALANCE BUDGET
Since the current administration took office in 2011, it has implemented a fiscal stabilization plan based on spending controls, improved revenue estimation and collection, and bond issuance to both pay overdue and accumulated tax refunds as well as to provide budgetary relief. The BPT backed bonds were issued as part of this plan to finance liabilities that had accrued to past general fund budgets. Guam has a history of weak general fund operations, operating deficits, a large end-of-year fund deficit, and GAAP deficits. Guam also issued deficit funding GO bonds in fiscal 2009.

With gradual fiscal improvement since the plan was put into place, the government reports that the budget was balanced in fiscal 2014 and that it issued tax refunds without any need for external financing. A balanced budget was enacted for fiscal 2015, which began Oct. 1, 2014 that funds scheduled pay raises that were re-instated in fiscal 2014.

HIGH DEBT LEVELS
Guam's debt levels are quite high with tax supported debt equal to approximately 56% of personal income and \$7,147 per capita. Guam is effectively at the debt limit set in the Organic Act, the U.S. law under which it operates, which limits public indebtedness to 10% of aggregate tax valuation of property in Guam. The Guam Supreme Court has interpreted aggregate tax valuation to mean assessed value and statute sets assessed value to 90% of appraised value.