WASHINGTON — Market participants are exploring a variety of possible federal guarantees or direct loans for taxable military housing debt that would boost the liquidity of existing paper that is wrapped by troubled or downgraded insurers and make new deals feasible.
The calls for some kind of federal assistance dominated the discussion at The Bond Buyer’s annual military housing privatization conference here this week. They come as liquidity has dried up for much of the roughly $21 billion in outstanding military housing debt because it is wrapped by downgraded bond insurers, largely MBIA Insurance Corp., now National Public Finance Guarantee Corp., or Ambac Assurance Corp. But some type of federal guarantee on the debt — possibly from mortgage giants Fannie Mae or Freddie Mac, two government-sponsored enterprises, or GSEs, that are effectively controlled now by the Treasury Department — could draw more investors into the market and pave the way to the issuance of new bonds that would finance additional phases of existing projects, conference participants contended.
Though guaranteeing all outstanding military housing debt would probably not be feasible, conference participants said, guarantees on the bonds’ debt service reserve funds “is certainly an area we should explore,” said Philip Korot, managing director of Bank of America Merrill Lynch, who moderated a panel yesterday on how the federal government can attract new demand to the military housing sector.
Korot added that discussions of federal guarantees would be too limited if they just focused on coverage of debt service reserve funds. They should also include the possibility of a guarantee similar to a moral obligation that is used by some issuers in the muni market.
In addition, the military housing market may also want to consider changing the structure in which its debt is sold, which is typically done through private placements. Some consideration, Korot said, should be given to the model used by state housing finance agencies, in which they enter into a so-called common resolution or indenture that allows for the issuance of parity debt that is not cross-collateralized.
Such a structure might allow any residual payments owned by an individual branch of service, such as the Army, to accrue “to any troubled project, or any project that needs additional equity or any project that needs to write down the cost of its interest rate,” Korot said.
But participants in Korot’s panel were divided on whether some of the ideas for guarantees on the debt would become prohibitively expensive after they are scored by the White House Office of Management and Budget, which would estimate the cost of such programs on the federal budget.
Ivan Bolden, chief of the Army’s public-private initiatives division, said he had performed some preliminary work on the possibility of privatizing barracks for enlisted soldiers, in which the Army would essentially guarantee the debt because soldiers would be ordered to live there. But OMB said it would score the project at 100%, meaning that “if it’s a $100 million barracks, we would have to come up with $100 million right upfront,” he said.
