Military Issuers Need to Adapt, Panelists Say

WASHINGTON — Military housing bond issuers should keep an eye on Build America Bonds as likely competition as they attempt to reclaim a spot in the bond market — and the military may have a need for $25 billion of new housing debt in the future, panelists said yesterday at The Bond Buyer's Fifth Annual Financing Military Housing Privatization Conference.

"If we can ever figure out how to privatize unaccompanied housing — that is, the barracks — that would be another $25 billion of financing needs," said Bob Helwig, deputy director for housing in the housing and competitive services directorate of the Office of the Secretary of Defense.

The Pentagon has awarded a total of 99 projects as part of its housing privatization program as of January.

About 43% of base housing, or 58,000 units, are "old and in need of extensive repair," according to the Defense Department's military housing privatization website. In addition, there is a desire to issue more debt for additional housing at existing projects, such as at Camp Lejeune, N.C., said Antony Elkins, executive vice president and chief commercial officer of Lend Lease Americas, a developer on the projects.

Actus Lend Lease is the developer on Camp Lejeune housing projects. Its portfolio of privatization projects includes 8,059 homes in Atlantic Marine Corps communities.

But panelists who buy and rate the bonds said issuers need to make some changes if they want military housing to successfully compete with more popular paper, including BABs.

While BAB deals have rapidly grown to $4 billion or $5 billion in new deals per week, military housing deals are sluggish at best, panelists noted.

Investors that seek long-term bonds are now being served by the BAB market, said James Robinson, director of municipal sales at Barclays Capital, who noted that there was only one bidder for a military housing bond deal that came to market this week.

To pick up the slow-going market, the panelists suggested ways for market participants to make the bonds more appetizing to buyers.

"We would like to see this asset class resurrect and get to a point where we feel comfortable investing our dollars," said Frank Monfalcone, director at Metropolitan Life Insurance Co.

"Right now, we are on the sidelines," but would consider buying more of the privatized housing debt, Monfalcone said.

The company originally bought the debt because it "thought the cash-flow stream should be relatively stable. We invested pretty heavily in the asset class," he said.

Improved reporting on military housing bonds should be a high priority, Monfalcone said. It is currently "very difficult to understand how the deal is performing" based on the current reporting offered for many of the bonds. "You're always afraid you're missing something."

It is hard to justify buying more of the sector's debt without an improvement in reporting and without a debt-service reserve, he said. Additionally, it "may be necessary to remove insurance from the deals," Monfalcone said.

Disclosure and simply offering more information on the deals is essential, agreed Sean Fallon, head of taxable municipal trading at Raymond James and Associates Inc. "You're competing with BABs, [which are] very easy to get information on."

Data also shows that the type of bondholder for military housing has changed over the past several years, according to Christopher Dillon, portfolio manager at Concordia Advisors LLC.

Life insurance companies, government-sponsored enterprises, and commercial banks this year are holding a smaller share of military housing bonds than they did in 2004.

"If you're a marketing manager, you're going to say, 'Hmm, well, that's a problem that should figure into our marketing strategy,' " Dillon said.

In addition to courting new investors, issuers could make some changes that would remove large blind spots that make even seasoned investors nervous about buying the bonds, panelists said.

A debt-service reserve fund could help clarify or strengthen the bonds' value, panelists said.

Without a reserve, "we're looking at a B/AA range" for military housing bond ratings, said Florence Zeman, senior vice president of Moody's Investors Service.

Helwig said earlier in the day that pushing for a reserve fund guarantee was not his highest priority.

But another panelist, David Rozen, vice president of finance for Picerne Military Housing, argued that military housing has unique advantages over other sectors.

The government often contributes equity, all profits are reinvested, and military housing has so-called tenant waterfalls that allow people such as retired military, guard and reserve military, defense contractors, and the general public to occupy the units if vacancies reach a certain threshold, Rozen said.

Upcoming Events

Already a subscriber? Log in here
Please note you must now log in with your email address and password.