OREANDA-NEWS. Fitch Ratings has placed the following ratings of the U. S. Virgin Islands (USVI) Public Finance Authority (VIPFA) and the Government of Guam (Guam) on Rating Watch Negative:

--VIPFA matching fund revenue bonds senior lien rating of 'BBB';

--VIPFA matching fund revenue bonds subordinate lien rating of 'BBB-';

--VIPFA matching fund revenue bonds (Diageo project) rating of 'BBB-';

--VIPFA matching fund revenue bonds (Cruzan project) rating of 'BBB-';

--VIPFA gross receipts tax (GRT) revenue bond rating of 'BBB';

--Guam business privilege tax (BPT) bond rating of 'A-'.

SECURITY

--USVI Matching Fund Bonds: Matching fund bonds are special, limited obligations of VIPFA payable from and secured by a pledge of and lien on the trust estate of each respective indenture, primarily matching fund revenues associated with rum production at the Cruzan and Diageo facilities located on the USVI.

--USVI GRT Bonds: The GRT revenue bonds issued by VIPFA are secured by a pledge of GRT collections from the USVI deposited to the trustee for bondholders prior to their use for general purposes. The bonds also carry a general obligation pledge of the USVI (Issuer Default Rating [IDR] 'BB-').

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

KEY RATING DRIVERS

PROMESA PASSAGE: The rating actions follow the enactment of S.2328, an act known as 'Puerto Rico Oversight, Management, and Economic Stability Act' or 'PROMESA' on June 30, 2016. PROMESA fundamentally alters the premises used to rate certain tax backed debt issued by territorial governments distinct from and above the territory's IDR.

The adoption of PROMESA demonstrates the capacity of the federal government to adopt legislation controlling territorial bankruptcy in much the same manner that a state might do to control the ability of municipalities to seek bankruptcy protection. Previously, territories were assumed to be like states which would not themselves be subject to insolvency proceedings. PROMESA creates a framework to allow an oversight board to initiate proceedings aimed at restructuring territorial tax backed debts as if the territory itself was a municipality.

Fitch has rated the securities being placed on Rating Watch Negative higher than the general credit quality of the respective territories based on their legal security structures. While the PROMESA legislation seeks to preserve the relative rights of lien holders, provisions of Chapter 9 that would otherwise protect holders of specific tax backed liens from automatic stay provisions require further assessment in light of the new legislative scheme. As ratings assigned to the securities are default ratings and do not incorporate recovery, it is likely that Fitch will determine that the territory's IDR limits any security rating absent other legal protection, such as intercept mechanisms or other special revenue designations.

Although PROMESA does not establish an oversight board for territories other than Puerto Rico, our extension of the inherent logic of the act to the rating of the tax backed debt of other territories would be consistent with the approach taken when rating municipal debt in states where local governments are not currently authorized by state government to file proceedings under Chapter 9. Fitch makes no distinction between entities in states that allow for local government bankruptcies and those that do not based on our belief that, if a state deemed an entity's best option to be a filing, the state would make the legal provisions necessary for that entity to file. We believe the same approach should be taken with respect to the federal power to authorize territorial bankruptcy.

RATING SENSITIVITIES

The Rating Watch Negative will be resolved when Fitch completes its review of the security structures of the bonds in light of the provisions of PROMESA. We will downgrade the ratings, likely to the level of the issuer, if we conclude that the security does not insulate bondholders from general government credit conditions.

Fitch has an Issuer Default Rating (IDR) of 'BB-', Negative Outlook on the USVI. Fitch does not have an outstanding IDR on Guam, but plans to assign one pursuant to revised tax-supported criteria as part of this review.

For additional information on these securities, please refer to the following commentary available on the web at fitchratings. com:

--'Fitch Affirms Virgin Islands Matching Fund Rev Bond Ratings: Outlook Stable' dated Aug. 13, 2015;

--'Fitch Affirms U. S. Virgin Islands' GRT Bond & Implied GO Bond Ratings; Outlook Remains Negative' dated June 5, 2015;

--'Fitch Rates Guam's $405MM BPT Bonds 'A-'; Outlook Stable' dated Aug. 18, 2015.