WASHINGTON — Amid a lackluster housing market, additional downgrades of military base projects and budgetary uncertainty, adjustment was the theme Thursday at The Bond Buyer’s sixth annual military housing privatization conference.
“In the last year, things have not moved very far beyond last year. Work is slowing down,” said Robert Helwig, deputy director for privatization for the Department of Defense.
Discussions at the Embassy Suites Hotel focused on the drop in the military’s basic allowance for housing, or BAH, program, an important revenue stream and yardstick for military housing transactions; rating downgrades of projects after the decline of monoline bond surety insurers such as Ambac, American International Group and MBIA; the use of a structure akin to commercial mortgage-backed securities to replace the monolines; and possible alternatives to the debt-service reserve fund requirement.
Some panelists questioned bond rating downgrades of projects by Moody’s Investors Service, including some they said were doing well. Florence Zeman, a Moody’s senior vice president, said many of those ratings were due to downgrades, and in some case ratings withdrawals, on the monolines. “We’re not rating the project, we’re rating the whole financing,” she said.
Zeman, speaking on a panel moderated by Pillsbury Winthrop Shaw Pittman LLP senior associate Eric Green, said Moody’s rates 23 financing projects that underwrite $10 billion worth of debt. Despite recent downgrades, 20 of them are still investment grade, with three rated AA and 11 rated A.
“These ratings are actually higher than for project financings in other segments of the housing sector,” she said. “A Ba rating is expected to pay and people should remember that.”
But Russell Bills, executive program director for special venture acquisition for the Naval Facilities Engineering Command, suggested Moody’s and other rating agencies be “more creative” and less stringent in assigning ratings.
“We’re not allowed to be creative,” Zeman responded. “The SEC won’t let us be creative. We rate according to published methods. There are things that could be done — cash traps, set-aside funds, third-party liquidity and letters of credit — but we’d have to go through the mechanisms to see what actually works.”
Bills questioned the need for a debt-service reserve fund requirement. “The debt service reserve fund, I believe, should go away. Just go away,” he said. “If your project is strong enough, you don’t need a debt reserve fund, so why should you be putting money aside in a way that won’t earn anything? If you’re in trouble, by then it’s too late to use this cushion.”
Earlier, Helwig said that since the housing privatization program took effect in 1996, the Pentagon has undertaken about 100 projects involving 190,000 housing units. It has appropriated $2.1 billion and generated $25 billion.
Helwig said challenges for the next 50 years include sustaining rates for military personnel under the BAH program; maintaining sustainment, recapitalization and modernization schedules; maintaining occupancy rates, which are tied to the BAH; and keeping management teams in place.
According to the Department of Defense, the average BAH rate decreased by 0.59% across all bases in the U.S. over the calendar year 2010, marking the first drop in the rate. BAH represents the housing allowance provided to service personnel to pay for off-base rent, utilities and renter’s insurance.
“The ability to keep revenue streams in place amid BAH uncertainty and ratings volatility is essential,” said Philip Korot, a managing director at Bank of America Merrill Lynch.
Helwig said projects face budgetary pressures — the Obama administration has called for $400 billion in defense cuts over 10 years. “There is debate over the budget. A number of these things come into play,” he said. “People are looking at the budget and saying, 'Should we look at compensating military personnel?’ They just assume every department will be creative.”
He also said the Pentagon is unable to move some projects along because of the military housing privatization project scoring initiative. Budget scoring is the percentage of dollar value of a project’s cost that must be allocated to an agency’s budget in a given fiscal year.
For example, if a project cost of $1 million is scored at 10%, then $100,000 of the agency’s budget authority for that year must be used to cover the assessment.
Scoring guidelines issued by the White House Office of Management and Budget stipulate that a project must be fully funded with enough budget authority in its first year to cover the government’s long-term financial commitment to the project.
Jere Thompson, a partner with law firm Ballard & Spahr LLP, said that despite the overall work slowdown, he expects the Air Force to execute more housing deals than the other armed forces branches.
“It’s their turn at bat,” he said.
