DALLAS - Insurance meant to buoy ratings for debt issued to finance military housing projects has instead become a drag after Moody's Investors Service placed $417 million of taxable revenue bonds on watch for possible downgrade.
The bonds, with debt service reserves funded by a policy from CIFG Assurance NA, financed construction of the Aurora Military Housing project at Elmendorf Air Force Base in Alaska and the Ohana Military Communities for the U.S. Navy in Hawaii.
CIFG's triple-A ratings fell to junk status as rated by Moody's recently in the wake of the subprime mortgage crisis.
Moody's latest action affects three series of bonds for Aurora Military Housing: $58.3 million of 2005A Class I bonds rated Aa1, $98.3 million of 2005A Class I bonds, and $19.8 million of 2005A Class II bonds, both rated Aa3.
Moody's also placed the A2 underlying rating on approximately $260.4 million of Ohana Class II Bonds insured by CIFG on watch but did not change the outlook for Class I bonds, which are insured by MBIA Insurance Corp.
Moody's analysts wrote that they were providing the developers time to find other insurance or another source of debt reserves before downgrading the debt.
Standard & Poor's rates Aurora's senior-lien debt AA-plus with stable outlook with a AA on the junior-lien bonds. Fitch Ratings does not rate the debt.
Standard & Poor's conferred its AA/stable rating on $250 million of Ohana bonds last September. Fitch rates Ohana's CIFG-insured bonds A and the MBIA-backed bonds AA.
Proceeds from the 2007 series A bonds are financing an additional 917 Ohana housing units by September 2014. The Phase IV project represents 14% of the 6,565 units that will be completed under all four phases of the project developed by Forest City Enterprises.
Moody's action affects Ohana bonds issued in 2004, 2006, and 2007. It comes a month after the agency cut the underlying ratings on roughly $110 million of taxable revenue bonds issued for Nebraska-based Offutt AFB America First Communities LLC from Aa3 to A2. Those bonds were insured by XL Capital Assurance Inc.
Analysts separately extended their placement of the Missouri-based Leonard Wood Family Communities on the agency's watch list for a possible downgrade.
The Army's Fort Leonard Wood facility faces less demand than originally expected when it began its three-year old plan to build up to 2,000 new units on the base located about two hours southwest of St. Louis. Roughly $202 million of taxable revenue bonds were originally issued by Leonard Wood in three tranches in April 2005 in a sale that was to finance the acquisition, demolition, renovation, and construction of 2,242 units on the site.
Earlier this month, Moody's cut the credit ratings on CIFG Holding Ltd.'s bond-insurance units to junk territory, reflecting the "high likelihood" that it will fall below minimum capital requirements in New York and Bermuda.
CIFG chief executive John Pizzarelli said the company was seeking solutions to its capitalization problems.
"We are currently in negotiations to develop strategic alternatives for problematic credits with the goal of CIFG emerging with a clean balance sheet and significantly improved capital position," he said in a prepared statement.
"Absent material developments, the firm will fail minimum regulatory capital requirements in New York and Bermuda due to expected significant increases in modeled loss reserves," Moody's analysts wrote.
About 85% of $17.9 billion of outstanding rated military housing bonds are insured, according to Standard & Poor's.
Despite the insurance problems and troubles in the civilian housing market, the outlook for military housing generally looks strong, according to a January report from the agency.
"We expect strong issuance for 2008," analysts wrote.
