Public Finance Authority — Moody’s assigns Baa1 to Public Finance Authority Federal Lease Revenue Bonds (Fort Sam Houston Acquisition Financing), TX; outlook stable

Rating Action: Moody’s assigns Baa1 to Public Finance Authority Federal Lease Revenue Bonds (Fort Sam Houston Acquisition Financing), TX; outlook stableGlobal Credit Research – 23 Mar 2022New York, March 23, 2022 — Moody’s Investors Service has assigned a Baa1 rating to the Public Finance Authority $207.8 million Federal Lease Revenue Bonds (Fort Sam Houston Acquisition Financing), Federally Taxable Series 2022. The outlook is stable.RATINGS RATIONALEThe Baa1 rating reflects several factors, including the credit strength of the United States government (Aaa stable) to make timely lease payments and the essentiality of the facilities to the mission of the US military, as well as their physical location on Joint Base San Antonio (JBSA). These strengths are counterbalanced by the complexity of the lease/sublease structure, and the high leverage on the three-facility project that will remain at bond maturity.Moody’s views the numerous subleases with the various military entities to be extremely likely to be renewed on or before expiration. Absent sublease renewal, recovery for bondholders will be limited. The bonds mature three to five years after the expiration of the sublease renewal periods, leaving some flexibility for a refinancing of the large bullet payment that will be due upon maturity, and we expect the renewal terms will support a refinancing and repayment of amounts outstanding at that time. In Moody’s opinion, the financed project is essential, and its physical location on JBSA, as well as the historic importance of two of the buildings, supports our view of renewal.Like most federal lease transactions with renewal risk, the project benefits from a satisfactory legal and cash flow structure, which includes a strong US federal government tenant, a mortgage lien on the facility and its leasehold interest in the property, and the assignment and direct payment of all lease payments to the trustee, that reduces bondholders’ exposure to operating risk of the borrower and property manager. There is also a debt service reserve fund equal to 25% of annual debt service, that may assist if there is a temporary disruption in lease payments. Given the project is located on a military base, the borrower only maintains a leasehold interest in the property, the land is owned by the US government via the Air Force. The borrower is party to a ground lease with the United States Air Force for each of the three buildings. The ground leases expire in 2066 and 2067, with options to extend, giving ample time for full amortization of the bond principal.The ability of the property manager/borrower to maintain the facility and meet the terms of the various agreements, including the lease with the federal government, is a material governance consideration, and a key driver of this initial rating.RATING OUTLOOKThe stable outlook reflects our expectation that monthly lease payments will continue to flow uninterrupted to the trustee during the current term of the lease, as well as through the sublease renewal option periods, owing to the strong legal and cash flow structure, and that the tenant, the United States of America, acting through the Air Force, will maintain its strong credit quality.FACTORS THAT COULD LEAD TO AN UPGRADE OF THE RATING- Reduction in debt levels or final bullet payment that reduces overall leverage and refinancing risk- Strong indications that the renewal periods for the subleases will be renewed with terms that enable all bond payments to be services with revenues from subleases current in force.- A large, measurable increase in the market value of the project, that would provide high bondholder recovery in the event the subleases are not renewed.FACTORS THAT COULD LEAD TO A DOWNGRADE OF THE RATING- Material credit weakening of the United States- Increased leverage on the projects- Interruption or delay in monthly sublease payments- Nonperformance of its obligations under the ground lease or subleases by the borrower- Increased risk of non-renewal of the subleases, due to deterioration in asset condition, weakened relationship between the ground lessor, or sublessees, and/or material reduction in US military operations that negatively impacts JBSA.LEGAL SECURITYThe bonds are limited obligations of the issuer payable from the trust estate, which has been pledged and assigned to the trustee. Revenues flowing to the trust estate are payable pursuant to a loan agreement between the issuer and the borrower, Fort Sam Acquisition, LLC (Fort Sam Houston Project) (TX). Debt service on the bonds is paid with monthly sublease payments from the federal government, via several military and US Department of Defense entities that are utilizing space within the three facilities. The bonds are also secured by a lien on the leasehold mortgage on the three facilities, as well as a debt service reserve fund funded at one quarter of annual principal and interest payments. All security interests and leasehold interests in the property, and rights to the leases, rents and property management agreements have been assigned from the respective parties to the trustee.The bullet payment due at maturity is intended to be paid with the proceeds of a bond refinancing.USE OF PROCEEDSProceeds of the bonds will be used to acquire the leasehold interest in the three leased facilities at Fort Sam Houston.PROFILEThe United States has the world’s largest economy and is the center of global trade and finance, with a gross domestic product of $20.9 trillion in 2020. Its population of 328 million is third-largest.Public Finance Authority is a Wisconsin conduit issuer. The PFA is a unit of government and body politic that is separate and distinct from the state of Wisconsin and PFA members.The borrower and obligor is Fort Sam Acquisition, LLC. Fort Sam Property Trust is an affiliate of Woodbranch Capital, a firm specializing in single tenant net lease properties. The borrower is a single purpose entity that maintains a leasehold interest in three buildings on Fort Sam Houston, a component of the Joint Base San Antonio.METHODOLOGYThe principal methodology used in this rating was Lease, Appropriation, Moral Obligation and Comparable Debt of US Local Governments Methodology published in March 2022 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBM_1317546. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.REGULATORY DISCLOSURESFor further specification of Moody’s key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody’s Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody’s rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider’s credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.Moody’s general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1288235.At least one ESG consideration was material to the credit rating action(s) announced and described above.Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody’s legal entity that has issued the rating.Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating. Denise Rappmund Lead Analyst State Ratings Moody’s Investors Service, Inc. Plaza Of The Americas 600 North Pearl St. Suite 2165 Dallas 75201 U.S.A. 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