image description

DEFENSE COMMUNITIES 360

DOD Spending Cuts Could Harm Credit of Military Housing Bonds

  • September 6, 2011
  • comments:0

Bond financings for military housing privatization projects could be hurt by the estimated $350 billion in spending cuts called for under last month’s agreement to raise the nation’s debt ceiling, according to a new report from Moody’s Investors Service.

Credit ratings for bond financings would be affected only by budget cuts that create a potential for lowering the revenue stream supporting the bonds. Where the reductions fall matters, as certain cuts could be broad and affect all bond financings, while other cutbacks could be limited to certain installations and have an impact only on associated projects, the report said.

The largest threat to housing projects would come from prospective changes to the basic allowance for housing service members receive from DOD. These payments are the principal revenue source to pay operating expenses on projects and the debt service on bonds.

A reduction in the end strength of the military — or a reorganization of units — also would be significant as it would shrink the number of tenants available to live in military housing.

Other budget changes could have more localized effects on housing privatization projects, Moody’s said. Cuts in spending on weapons systems, the elimination of major projects or a decision to slow the pace of shipbuilding, for example, could result in a smaller pool of tenants for housing at specific bases. Similarly, a new round of base closings — if Congress were to authorize one — would harm bond financings at affected installations.

Belt-tightening at the Pentagon also could reduce the department’s flexibility to invest funds in housing projects facing challenges affecting their financing, such as construction delays or low occupancy.

Offsetting the potential for DOD budget cuts to harm bond financings are several positive credit factors associated with the military’s housing privatization program, including the presence of experienced management teams and strong market positions, the report stated.

Moody’s does not expect to take any rating actions in the near term, with the potential impact of budget cuts occurring over a longer horizon.

Leave A Reply

*


− one = 0

Array ( )