WASHINGTON - The military housing sector remained strong last year despite the financial market collapse, economic recession and worsening housing crisis, Standard & Poor's said in a research report released late Tuesday.

Though the sector performed well, it saw a substantial decline in issuance and rated volume last year, in part because of the financial crisis, the report said. In addition, it said the number of transactions in the pipeline diminished because the vast majority of U.S.-based military housing has already been privatized.

"Although we observed fewer new ratings and smaller par amounts in 2008, we believe the military housing sector remains healthy," said Standard & Poor's credit analyst Karen Fitzgerald. "Debt service coverage ratios continue to grow, occupancy levels remain what we consider strong, the congressionally appointed basic allowance for housing is rising overall, and demand for military housing is high."

The basic allowance for housing is commonly referred to as the BAH.

In 2008, Standard & Poor's assigned 18 new ratings with a total par volume of $1.726 billion, almost half the 32 new ratings tied to a total par volume of $4.213 in 2007. The figures for both years are significantly lower than the peak of 44 new ratings assigned to $5.620 billion of debt in 2005.

Meanwhile, the report said that the average issue size, after topping out at $132 million in 2007, declined to a four-year low of $96 million in 2008.

"We believe this is partly attributable to the fact that six of the new issues in 2008 were done for the purpose of financing a second or third phase of an existing project, and such financings tend to be smaller than the original financing," it said.

Five of the new issues the rating agency rated last year were to finance three new projects, and another three issues were for debt restructuring for one existing project.

An additional four new ratings were assigned to bond issues for existing projects, which had been previously assigned public ratings based only on the bond insurance providers. Those providers were subsequently downgraded.

Noting the widespread problems with bond insurers, Standard & Poor's said it nonetheless believes the military housing sector is strong. It noted that there are 114 bond issues that are either uninsured or carry underlying ratings, with 92% of the par amount in the AA category and 5.8% of the par amount in the A category, "indicating our view of the very high credit quality of the underlying collateral."

Last year, Standard & Poor's affirmed existing underlying ratings or uninsured ratings on 49 issues, upgraded two issues, and downgraded three. Though it made 31 outlook changes and placed bond issues on CreditWatch 29 times, the majority of the actions were not related to the underlying credit quality of the military housing projects themselves. Rather, the report said, they "resulted primarily from rating changes on counterparties that provided partial support to military housing transactions in the form of investment agreements."

Military privatization deals were first done in the 1990s when the Pentagon decided to improve its housing stock across the nation in order to reverse falling military reenlistment numbers. Proceeds from the sale of taxable military housing debt typically are used for mortgage loans that allow the Department of Defence to transfer existing military housing to developers subject to a 50-year ground lease. In exchange, the developers must agree to operate and maintain the housing, which is made available to military personnel.

The major advantage of such transactions is the built-in demand that the military provides. While other multifamily projects must compete in the marketplace, military housing has a ready supply of tenants set to move in. The projects also are backed by a strong revenue stream, the BAH, which Congress appropriates to the Defense Department.

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