CHICAGO - Moody's Investors Service this week cut the underlying ratings on roughly $110 million of taxable military housing revenue bonds issued for a Nebraska Air Force base - primarily to reflect the downgrade of the bond insurer that guarantees the issue's debt service reserve.
Moody's downgraded to A2 from Aa3 roughly $110 million of taxable housing revenue bonds that were issued in 2005 by Nebraska-based Offutt AFB America First Communities LLC. At the same time, Moody's affirmed the A3 rating on about $27 million of class II bonds sold as a second series in the same issue. Standard & Poor's rates the class I bonds AA, and its class II bonds AA-minus.
The drop in the underlying rating was primarily due to Moody's downgrade of XL Capital Assurance Inc. The debt service reserve on the bonds is in the form of surety policies provided by XL, the once triple-A insurer that Moody's now rates A3 and continues to review for a further downgrade. The underlying rating remains one notch above XL's rating, as it was one factor, albeit a significant one, in the underlying rating.
"We looked at the overall credit, and placed it in context, but it was downgraded because" of the insurance, said Moody's analyst Toby Cook. The second series for $27 million retains its A3 rating. XL had also provided insurance for the bonds, but the Aa3 and A3 ratings represented underlying credits.
The Offutt base is in the middle of an eight-year construction period in which it is demolishing nearly 2,000 more units, rehabbing about 500 more, and building nearly 1,000 new units.
In addition to the bonds' now-downgraded insurer, the Air Force base faces a few other struggles. That includes a lower occupancy rate than originally projected, as well as the rental of more units to unmarried service members - who have lower basic allowance for housing, or BAH - than for married soldiers with children.
But Moody's expects these concerns to be eased as more units get built. As occupancy increases, so will the presence of accompanied service members with higher BAHs, he predicted.
Developers do not plan to restructure the debt, said Dominic Vaccaro, vice president of America First Real Estate Group, the developer of the base.
As for other concerns, Vaccaro said officials remain optimistic that occupancy by service members with higher BAHs will continue to rise.
"Starting this year, we are adding a significant number of new homes, which we think are going to be very attractive and marketable to new families," Vaccaro said.
Meanwhile, analysts separately extended their placement of the Missouri-based Leonard Wood Family CommunitiesLLCon 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. The roughly $202 million taxable housing 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 a total of 2,242 units on the site.
In the original ratings, analysts cited the base's classification by the military as one of only two training bases considered "highly essential" as a key credit strength because it makes it unlikely the Department of Defense will close it. That classification still remains for the base, according to Cook.
The bonds retain their original ratings: The class I series for $166 million received an Aa3 rating from Moody's, and an AA-minus from Standard & Poor's. The class II series received A3 and A-minus ratings, respectively, and the $8.3 million class III series received a Baa2 and a BBB rating.
But demand has not been as strong as originally projected, and developers recently decided to trim construction from 2,242 units to 1,806 units. The developers are now planning to call the original bonds and refund the debt to reflect those scaled-back plans.
"That's going to take less money," Cook said.
Standard & Poor's last year revised its outlook to stable from positive on the bonds.
