A recent settlement between Bank of America and MBIA Insurance Corp in regards to MBIA’s suit against the mega bank over sour mortgage-backed securities is credit positive for the military housing sector, analysts claim.
Bank of America (BAC) agreed to pay MBIA (MBI) $1.7 billion to settle years-long lawsuits and counter suits between the two companies, with MBIA using the proceeds to repay its outstanding debt to National Public Finance Guarantee Corporation, a subsidiary the insurer created to continue insuring municipal bonds as MBIA unraveled in 2009, Moody’s Investors Service said in its latest credit outlook.
The settlement affords National additional resources to support sureties it provides on debt service reserve funds of military housing bonds.
"Military housing projects draw on the debt service reserve funds if they lack sufficient net revenue to pay debt service, which is why debt service reserve funds are an integral part of privatized military housing projects," said Ferdinand Perrault, vice president and senior analysts for Moody’s.
He added, "This could occur for a variety of reasons, including a deployment or base restructuring that results in low housing occupancy, a reduction or lower than expected increase in the Basic Allowance for Housing was due to an economic downturn or increased expenses, such as utilities."
Although property management of military housing projects would institute measures to try to improve the performance of the project, the debt service reserve fund would be available to avoid disruption in debt service payments until performance improves.
For instance, of the 24 financings that Moody’s rates, 20 have debt service reserve funds covered by surety bonds in lieu of being funded with cash.
For such financings, the credit position of the surety bond provider — such as National — is an important factor in the credit assessment of the financings.
National provides surety bonds on seven military housing bonds with outstanding principal of roughly $5.8 billion.
In 2008, MBIA suffered significant credit deterioration as the value of their mortgage linked assets declined sharply during the housing collapse.
In the wake of the crisis, MBIA instituted a restructuring plan that included transferring all of its municipal bond portfolio that it insures – including military housing bonds – to National, Moody’s explained.
As part of the restricting plan, MBIA borrowed $1.7 billion from National.
Thus, "MBIA will use the settlement proceeds to repay its $1.7 billion debt to National, providing additional resources for National to pay any potential claims on their bond insurance policies and draws on debt service reserve surety bonds such as those provided on military housing bonds," Perrault concluded.