WASHINGTON - Most military housing bonds will be bolstered by the Defense Department's 6.9% average increase in the Basic Allowance for Housing rates for 2009, but some are still facing credit issues, such as those insured by companies whose ratings have been downgraded, Moody's Investors Service said in a report.

The report, issued late Friday, said the 22 military bases rated by Moody's experienced an average increase of 5.46%. The BAH rate, which fluctuates for each base on a year-to-year basis, is the housing allowance provided to U.S. service members to pay rent, utilities, and renter's insurance and is the primary source of revenue used to pay debt service on military housing bonds.

"The BAH levels determined by the annual rate adjustment can strongly affect the long-term financial position of the military housing projects and their bonds," said Moody's assistant vice president Rachael McDonald and author of the report. "We will review the increases in the context of all of the other credit factors, such as counterparty risk, project demand, local market dynamics, legal structure, construction risk, and base essentiality, in order to assess the impact of the BAH increases on ratings."

Most housing bond transactions were structured with an expected 2% BAH increase for the first five years of the deal, the report said. Based on an average of the year-to-year rate changes, the majority of the bond deals have experienced greater than 2% BAH increases over the life of the deals, which suggests that revenue growth based on the rate is performing in line with projections.

The consistent BAH increases experienced by a majority of military housing projects are a positive credit factor for the sector, said Moody's senior vice president Florence Zeman. But the effect of each of the increases will be looked at individually at each base to understand their true impact on the financial health of the project, she added.

"We look at a bunch of things, including the BAH" when considering a credits' strength, but this is "just one of them that actually had some good news," Zeman said.

Moody's last year put the underlying ratings of a number of military housing bonds on watch for possible downgrade because of the downgrade of financial guarantors. These guarantors provided bond insurance and surety bonds for the debt service reserve funds of the transactions. As a result of the downgrades, the surety bonds no longer provided sufficient security to maintain the ratings, according to the report. As of Jan. 9, 17 of 22 military housing deals rated by Moody's were still on its watch list for downgrade.

For example, Moody's put two military housing deals on watch for downgrade because of their backing by troubled insurance giant American International Group Inc., which lost its triple-A rating.

Military housing revenue bonds from California's Fort Irwin Land and Virginia's Belvoir Land also were affected because AIG provides surety bonds for their debt service reserve funds.

"We're still working on those [and others], and we are hoping to resolve them soon," Zeman said. "The BAH levels will be factored into the ratings, but the other issues are still on watch."

"We will also closely watch how the current economic slowdown and housing crisis affects rental rates in the markets surrounding the rated bases in order to anticipate any changes to BAH rates that may result from these market dynamics," McDonald said.

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