The outlook revision reflects Standard & Poor's recognition of the strength of the basic allowance for housing (BAH), one of the key credit strengths in privatized military housing bond issues. Standard & Poor's has determined that debt supported by nonproject specific, federally appropriated revenues, such as BAH, is less risky than debt supported by project specific revenues, and concluded that this risk profile should be reflected in the assignment of the rating. While only bonds that are secured by the full faith and credit of the U.S. government will receive a 'AAA' rating, those bonds that are secured by nonproject specific appropriated revenues and possessing other strong credit fundamentals may warrant ratings as high as one notch below the full faith and credit rating of the U.S. Privatized military housing bonds, in particular, are eligible for ratings as high as 'AA+'. Military housing privatizations are project-specific and tied to specific bases, but the BAH as a component of servicemembers' pay is not appropriated for individual bases. Rather, military pay is a federal expense incurred on behalf of members of the military.

The ratings reflect strong debt service coverage of 1.72x on the class I bonds, 1.30x on the class II bonds, and 1.15x on the class III bonds for the fiscal year ended June 30, 2006; rental revenues higher than original projections, due to a 10% increase in the Basic Allowance for Housing (BAH) for 2006 in the Honolulu area; the strategic military value of bases located in Hawaii; and the strong asset quality of the housing portfolio.

Complete ratings information is available to subscribers of RatingsDirect, the real-time Web-based source for Standard & Poor's credit ratings, research, and risk analysis, at www.ratingsdirect.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com; under Credit Ratings in the left navigation bar, select Find a Rating, then Credit Ratings Search.

Primary Credit Analyst: Tabare Borbon, New York (1) 212-438-7970; tabare_borbon@standardandpoors.com

Secondary Credit Analyst: Louis F Louis, New York (1) 212-438-2054; louis_louis@standardandpoors.com

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