Military Housing Privatization Initiative bond financings could be negatively affected by budget cuts expected to hit the Department of Defense, according to Moody’s Investors Service.
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The Budget Control Act passed last month requires $350 billion in cuts to military spending over the next 10 years, and while those cuts have not yet been specified, they could affect the revenue streams that support military housing bonds.
“We don’t know which specific areas will be affected, but we rate nearly $10 billion of MHPI debt that may be vulnerable,” said analyst David Parsons. He added that while there are no rating changes now, Moody’s will watch closely for any changes as budget talks develop. The majority of the MHPI bonds are rated in the A and BBB categories.
Depending on the types of budget cuts, the entire MHPI housing sector could be negatively affected or certain bases and their bond financings could see impacts. Moody’s said any changes will have a negative effect over the medium to long term, or about five years out.
The biggest threat to MHPI housing will be changes in payments from the basic housing allowance—a compensation package for military personnel to cover the cost of housing. The MHPI typically receives the housing allowance directly from the Department of Defense, and the payments are the primary revenue to pay operating expenses on the project and the debt service on the bonds.
“While we are not aware of any current discussions that relate to changing the BAH [basic allowance for housing], any changes in those payments would be significant to this sector because the BAH is the primary source of revenue to pay the MHPI bonds,” Parsons said.
He added that depending on the level of change and whether it is through modifications of the policy or reductions in housing allowance, “this could have an immediate impact on the ratings of the financings.”
Another fairly large factor that could affect the ratings is a reduction in troop levels or a change in the scope of military activity, as a reduction in troops would mean a lower number of tenants in military housing. If the Department of Defense reduces or consolidates military units, the number of personnel at those bases will fall, pushing up vacancy rates.
“Any reductions in troop levels would reduce the number of troops using base housing,” Parsons said. “So there is less revenue to support housing.”
While cuts in housing allowance and a reduction in military activity could directly affect bond financings, other factors may play an indirect role in negatively affecting the bonds.
Parsons said the elimination of major projects, including cuts in spending on weapons or other capital expenditures, could indirectly impact the housing bonds. For example, the level of personnel at a Navy base could be affected by reductions in shipbuilding, he said.
Moody’s will also take a look at the base realignment and closure process, which is expected to take place in 2015. The process was put in place to increase efficiency and reduce expenses on operations and maintenance. The last process took place in 2005, and 2015 could see more base closures or reductions in base size or population.
Moody’s also said that if the Department of Defense resources are cut, they may have less flexibility to provide support to military housing projects, including support regarding construction delays, environmental issues, or low occupancy.
However, not all is bad news. Moody’s said the MHPI financings have certain credit factors which set them apart from other housing credits, like experienced management teams and strong market position.
And while the $350 billion in budget cuts for the military will occur over the next 10 years, Parsons is looking to November when a congressional panel will seek an additional $1.5 trillion in cuts and the Department of Defense could see additional cuts in spending. “The amount of cuts depends of what categories and when,” he said. “So there are a lot of unknowns.”