Proposed Pentagon Budget May Hurt Military Housing Bonds

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The FINANCIAL — Fitch Ratings-New York – The proposal to reduce the U.S. active-duty armed forces, limit increases in basic allowances for housing (BAHs) and retire two aircraft fleets could be negative for some military housing bonds, Fitch Ratings says.

The reduction in Army personnel from the current 520,000 to the proposed 440,000-450,000 could reduce housing demand at Army bases, as could the retirement of the A-10 Warthog and U-2 reconnaissance aircraft at some facilities. However, bases that support Special Operations or the Global Hawk aircraft could maintain or add personnel as the proposed budget strengthens these programs.

The retirement of the A-10 aircraft fleet could reduce the number of active-duty personnel at Missouri's Whiteman Air Force Base, for example, lowering housing demand and revenue. The military housing at Whiteman represents 27% of the units providing revenue to support bonds in a transaction issued by Western Group Housing, LP.

The proposal's impact at other bases could be mixed. Beale Air Force Base in California could lose the U-2 aircraft but the program for another of its planes, the Global Hawk, could be strengthened. This base includes housing units which also support the Western Group Housing bonds, accounting for 16% of the financing.

Fitch will continue to monitor the proposed Department of Defense Budget as it is reviewed by Congress.

To date, Fitch has assigned approximately 27 public ratings totalling $3.5 billion in outstanding military housing bonds (MHB) through 13 transactions. The financial health of a military housing project is tied to the receipt of the BAH, which is the main revenue component for the repayment of MHBs once construction has been completed. The main risk to these bonds is base realignment and closure, according to Fitch Ratings.



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