Fitch Rates $181MM Western Group, LP (PA) Taxable Military Hsng Revs Ser 2012 'AA'; Outlook Stable

NEW YORK--(BUSINESS WIRE)--Fitch rates the Western Group, LP Taxable Military Housing Revenue Bonds, Series 2012 (Airforce Western Group Privatization Project) 'AA'. The two series of 2012 bonds are as follows:

--$146.6 million 2012 series A-1;

--$34.2 million 2012 series A-2.

The Rating Outlook is Stable.

SECURITY

The bonds are limited obligations of the project owner secured by a lien and security interest in the properties and improvements pursuant to the trust indenture, four separate mortgages and deeds of trust granted to the project owner for the benefit of the trustee and the collateral pledged by the owner under the lockbox agreement. All rental receipts of the projects are predominantly derived from the basic allowance for housing (BAH) (after payment of project operating expenses) from U.S. military service members stationed at Whiteman, F.E. Warren, Malmstrom and Beale Air Force Bases (AFBs) in the following states, Missouri, Wyoming, Montana and California.

KEY RATING DRIVERS

DEBT SERVICE COVERAGE: The bond rating and Outlook reflect the projected sound debt service coverage which is expected to be maintained at no less than 1.5 times (x) after the payment of operating expenses once the initial development period (IDP) is complete.

DOWNSIZED END-STATE: This transaction which includes housing and improvements on four Air Force Bases includes an end-state of 3,264 units which is a reduction from the 3,602 units that are initially being conveyed.

MEETING IDP SCHEDULE CRITICAL: Developer's ability to maintain a minimum of 2,700 units on line during construction and deliver end state units on time as set out under the IDP is pivotal to bondholder security.

MITIGATED CONSTRUCTION RISK: Construction risk is mitigated by significant number of units online during the IDP generating revenue, the low complexity level of the single-family construction, the presence of a payment and performance bond from a 'AA' rated provider during construction and the developer's history of developing military housing units. Balfour Beatty Co. will develop and manage the properties.

OCCUPANCY AND EXPENSES DRIVE COVERAGE: Management's ability to maintain high occupancy levels and manage operating expenses during IDP and throughout the life of the transaction is critical to maintaining high debt service coverage ratio (DSCR) levels.

BAH FLUCTUATIONS: Future annual fluctuations in BAH rates for the respective locations of the four bases will affect revenue, net operating income and debt service coverage.

BASE ESSENTIALITY KEY: The essentiality of the four subject air force bases lessens the possibility of closure and contributes to bondholder security.

DEBT SERVICE RESERVE FUND: A cash-funded debt service reserve fund sized at maximum annual debt service contributes to bondholder security.

SUBSTANTIAL EQUITY CONTRIBUTION: Equity contributions include a $142.5 million Government Direct Loan (GDL) from the Air Force in the form of an unrated subordinate loan which is funded over five years as new units are delivered and a developer equity deposit in the amount of $16.6 million.

CREDIT PROFILE

A limited liability company, BBC (Balfour Beatty Co.) Military Housing - Western General Partner, LLC, is the sole general partner of the project owner. Balfour Beatty and its affiliates will develop, manage and maintain the 3,264 end state military housing units at the four separate military installations. The end-state will be made up of 714 new units, 506 renovated units and 2,044 units retained in their current state. Balfour Beatty has held an ownership interest in, and has operated through subsidiaries, 18 military family housing privatization projects, covering 43 bases (representing the Army, Air Force and Navy) in 20 states.

In this transaction there is a substantial equity contribution in the form of the $142.5 million GDL from the Air Force which is phased in during the IDP as specific construction milestones are met. Additionally, Balfour Beatty will make a $16.6 million developer equity deposit at closing.

While the 2012 BAH rates demonstrated declines at three of the four subject bases from 2011 levels, the average annual change in BAH for all bases from 2006-2012 was positive and exceeds a minimum of 2% at each of the bases.

Pro forma cash flow projections are a key factor in the Fitch rating analysis. The cash flow centers on a project's DSCR throughout the life of the transaction. The DSCR is calculated after deducting the operating expenses and reserve and repair deposits from the rental revenues. This transaction's projected cash flow is considered to be strong at a minimum of 1.5x coverage following the IDP throughout the life of the bonds. Fitch also reviewed pro forma cash flows that incorporated various stress assumptions as to vacancy levels at each base, revenue declines and expense increases over the life of the bonds. These cash flows still demonstrate satisfactory coverage when the various stress assumptions are applied relative to its rated peer group.

The A-1 bond's debt structure includes fully amortizing debt with a 45-year term maturing in 2057. The A-2 bonds will be issued for a five-year term, paying interest only and maturing in 2017. The underlying property leases will have 50-year terms which begin after the IDP and will expire in 2062.

Additional information is available at www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.

The analysis was additionally informed by Market Studies from DDA DiSalvo Development Advisors, LLC.

Applicable Criteria and Relevant Research:

--'Revenue-Supported Rating Criteria,' June 20, 2011;

--'Rating Criteria for Military Housing,' Sept. 22, 2011;

--'Understanding BAH as the Cornerstone Security for Military Housing Transactions', Feb. 20, 2007.

Applicable Criteria and Related Research:

Understanding BAH as the Cornerstone Security for Military Housing Transactions

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=314582

Military Housing Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=651397

Revenue-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=637130

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