Fitch Affirms $185MM Western Group Housing, LP (PA) Taxable Military Hsng Revs Ser 2012 'AA'

Fitch Ratings has affirmed the 'AA' rating for the $185 million Western Group Housing, LP Taxable Military Housing revenue bonds, series 2012 A-1 & A-2 (Airforce Western Group Privatization Project).

The Rating Outlook is Stable.

SECURITY

The bonds are limited obligations of the project owner. They are secured by the following: a lien and security interest in the properties, 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

SOUND DEBT SERVICE COVERAGE: The affirmation of the ratings and Stable Outlook is based on the debt service coverage ratio (DSCR) of 1.82x, based on 12 months of unaudited operating data as of Dec. 2013, which exceeded the original proforma projection of 1.40x.

BAH REVENUE: While there were declines in the 2014 Basic Allowance for Housing (BAH) rates for some rank levels at all four bases from 2013 levels, when considered in aggregate with the 2014 BAH increases, the net effect is a less than 1% decrease in revenue.

STRONG PROPERTY OCCUPANCY: Occupancy for online units is strong at 97% as of Dec. 2013. The current number of units online (3,096) exceeds the required minimum of 2,700 during the initial development phase (IDP).

GOVERNMENT AND DEVELOPER CONTRIBUTIONS: Contributions to the original financing 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 component in the amount of $16.6 million.

CONSTRUCTION RISK MITIGATED: Construction risk is mitigated by the following: the significant number of units that are required to be online (minimum 2,700) during the IDP generating revenue, the low complexity level of the single family construction, the presence of a payment and performance bond during construction, and the developer's history of developing military housing units. Balfour Beatty, the developer, reports that construction is on schedule.

CASH FUNDED RESERVE FUND: A cash funded debt service reserve fund sized at maximum annual debt service contributes to bond holder security.

RATING SENSITIVITIES

BAH FLUCTUATIONS: Future declines in BAH rates for the four bases which generate housing revenue and serve as the main source of funds for the repayment of the bonds.

MEETING IDP SCHEDULE CRITICAL: Developer's ability to maintain on line units during construction and deliver end state units on time as set out under the IDP.

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.

BASE DOWNSIZING OR CLOSURE: Given the budget uncertainties related to sequestration, the likelihood of cuts to the Department of Defense military budget over the next decade grows. Some or all of the bases that support the Western Group financing may be subject to downsizing or closure as a result of future spending reductions. If one of more of the bases are subject to reduction or closure, these bonds would likely be subject to downgrade from their current rating level.

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 2,984 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 are substantial contributions from participants in the form of a $142.5 million GDL from the Air Force which is phased in during the IDP as specific construction milestones are met. The first disbursement of the GDL was made in the amount of $58 million in Dec. 2013. The next disbursement from the IDP is scheduled for July 2014. Additionally, Balfour Beatty made a $16.6 million developer equity deposit at closing which serves as an additional contribution to the transaction.

The properties unaudited operating statement demonstrates strong DSCR of 1.82x for the twelve month period ending Dec. 2013. This DSCR exceeds the original projection of 1.4x coverage. Strong occupancy levels of 97% at all four bases as of January 2014 are contributing to the sound DSCR.

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

Additional information is available at www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Revenue-Supported Rating Criteria'(June 3, 2013);

--'Rating Criteria for Military Housing' (Sept. 17, 2013).

Applicable Criteria and Related Research:

Revenue-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=709499

Rating Criteria for Military Housing - Effective Sept. 23, 2010 to Sept. 20, 2012

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=557825

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=816731

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