Privatized military housing credits — bonds that finance construction and renovation of on-base military housing — continue to demonstrate stable credit quality although possible federal budget cuts could weaken revenue, says Moody's Investors Service in a report.

"The overall credit quality of our rated portfolio has remained resilient during the course of the economic downturn due to the strong market position of the projects," said Moody's Analyst Carlos A. Calderon, author of the report. "The reliability of the basic allowance for housing -- the BAH -- as the primary revenue stream and management's ability to control operating expense growth have also been positive factors."

According to the report, "Credit Trends: Privatized Military Housing Sector Shows Stability," most of the financings are strengthened by robust financial performance of most projects due to solid occupancy and controlled expense growth; consistent lifetime growth in BAH rates; and the competitive advantage of on-base, newly constructed or renovated housing.

"Construction risk for about half of the portfolio has also been eliminated by completion of their IDPs -- the initial development phases," said Calderon. "Support from the military has added strength to the projects, including additional equity, units, or land."

While Moody's expects these trends to continue, expected military budget cuts and proposed base realignment and closures could affect the housing projects' future occupancy levels, reduce revenue streams through cuts in BAH stipends, and limit the Department of Defense's flexibility for providing additional forms of discretionary financial support. Commencement of bond principal amortization post-IDP may also cause financial strain, according to the rating agency.

Moody's maintain 54 ratings for 24 privatized military housing projects with approximately 87,000 housing units under management. The related transactions carry approximately $9.56 billion in outstanding debt and have a median rating of Baa1 by number of ratings and A2 by dollar volume. The bonds are secured primarily by project rental revenues, which consist of BAH stipends.

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