ARLINGTON, Va. - With spreads widening on privatized military housing bonds amid unprecedented market turmoil, issuers and underwriters need new debt structures to meet continuing demand, industry experts said yesterday.
"To borrow an appropriate term from the military, shock and awe is what we're experiencing in the credit market right now," Lehman Brothers senior vice president Chris Moriarty told an audience of industry executives at The Bond Buyer's Military Housing Privatization Conference here.
The spread on double-A rated bonds that traded at 35 to 40 basis points above the 30-year London Interbank Offered Rate in 2006 carried a spread of 130 basis points in January, Moriarty said.
Despite the upheaval, deals still need to get done. So, Moriarty sees a structure such as variable-rate debt swapped to synthetic fixed rates as an alternative.
The Federal Reserve's efforts to add liquidity to the market by allowing investment bank borrowing from the discount window has helped, he said. But he and others said the uncertainty over the credit markets continues to discourage risk-taking.
"For military housing, which is a product that takes a long time to develop, uncertainty can be very, very difficult to deal with," said Wendell Gartner, a principal at Banc of America Securities.
The market for military housing bonds, Gartner noted, is not large compared to other sectors, but it has aspects similar to several different varieties of debt.
"It looks a little bit like the high-grade credit markets, it looks a little bit like taxable municipal bonds, it looks a little bit like the real estate market," he said. "So, you have to take all of those together to see what's going on."
Gartner cited Thomson Financial's recent Global Market Debt Review for the first quarter of 2008 showing global debt issuance down 45%.
"That's the lowest dollar volume since 2003," he said. "And the number of high-yield deals is at the lowest level since 1991."
Mortgage-backed and asset-backed securities were down 82%, while securitization was down 96%, according to the study.
"The only clear winner? Federal agency debt was up 86%," he said.
The loss of the $600 billion auction-rate market, downgrades of monoline insurers, and the general uncertainty in the mortgage bond industry have impacted the military housing market as well as the civilian housing sectors, sometimes in inverted fashion, several speakers said.
"Military members often have no choice about when and whether to move," said consultant Carolyn J. Law, who has advised on numerous military housing privatizations. "That means that many military members are being forced to sell or rent out their homes in a time when housing prices and values have declined. This points to possible reduced competition for privatized military housing."
Military personnel who might have been priced out of the civilian market a year ago can now find deals in the civilian housing market, which also might reduce demand for base housing, Law said.
"Homeownership has been a major competitor," Law noted.
The privatized military housing bond market, created by Congress in 1996, has demonstrated its efficiency compared to previous Department of Defense efforts to accommodate troops, said Sen. Wayne Allard, R-Colo., who said he has a unique appreciation of the issues surrounding military housing privatization because of his positions on the military construction subcommittee of the Senate Appropriations Committee and as the ranking member of the Securities, Insurance, and Investment Banking Subcommittee of the Senate Banking Committee.
"Twelve years after creation of this program, it's clear that it works," he said.
Joseph Sikes, director for housing and competitive sourcing for the office of the deputy under secretary of defense, said the Base Realignment and Closure process that began in 2005 is still underway and will require continued development of housing at bases such as Fort Bliss near El Paso, where 25,000 troops will be relocated, along with dependents.
The Defense Department estimates that about half of its 257,000 units on and off base are in need of rehabilitation and that the most efficient way to upgrade the housing is through the private sector.
"This is a robust sector," said Philip Korot, managing director of Merrill Lynch & Co. "But looking back at the past may not give us the answers we need for the future."
