Defense Secretary Leon Panetta’s confirmation on Monday that new rounds of military base closures would not happen in 2013 benefits privatized military housing as a credit, rating analysts said.
“Certainly a [base realignment and closure process] is a potential negative for military housing, so not having a BRAC eliminates that negative,” Moody’s Investors Service associate managing director Florence Zeman said in an interview.
Panetta, speaking to the Association of Defense Communities in his hometown Monterey, Calif., acknowledged the difficulty of closing military bases in a presidential election year. Panetta represented Monterey in Congress for 16 years.
“This may not be the time for BRAC as our economy recovers, but sooner or later, one way or another, the department is going to need to take a hard look at its basing infrastructure as we seek to reduce our overhead costs,” he said.
Zeman said Panetta’s update pushes BRAC off for another year, but closing a base is a multiyear process. “You have a study, an approval process and then implementation so an actual change can take years before it becomes reality.”
“The deletion of the 2013 BRAC is a positive for military housing, although this is more of a delay,” said Guy LeBas, chief fixed income strategist at Janney Capital Markets in Philadelphia.
The Department of Defense has begun closing and realigning bases in Europe, and had proposed a BRAC commission for 2013 and 2015. The House and Senate armed services committees included safeguards against base closings in their versions of the 2013 defense authorization bill.
Moody’s last week said privatized military housing credits continue to demonstrate stable credit quality. A report, which analyst Carlos Calderon wrote, cited solid occupancy rates, controlled expense growth and consistent lifetime growth in the basic allowance for housing rates.
Project rental revenues, which consist of BAH stipends that the military pays to service members, secure the bonds.
Moody’s has 54 ratings for 24 privatized projects. The related transactions carry roughly $9.6 billion in outstanding debt. Their median rating is Baa1 by number of ratings and A2 by dollar figure. Moody’s affirmed 81% of its ratings in 2012 while upward changes in rating or outlook outnumbered downward changes.
“Occupancy has been strong, and the levels have gotten stronger,” said Zeman. In 2011, privatized housing featured a median occupancy of 96.1%, according to Moody’s, up from 93% in 2007.
LeBas said the decline in the 30-year yield, to 2.64% down from 3%, has slowed trading in the military housing market. He has also seen a change in the structure of military deals.
“Bondholders are always interested in receiving greater protection. In the broader marketplace, there’s been a trend toward a broader type of support built into a deal, as opposed to relying on the goodwill of the issuer,” he said.
