US: Fitch Completes U.S. Tobacco ABS Portfolio Review

Source from:  Fitch Ratings 08/14/2014

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In 2014, the aggregate MSA payment was 18.46% lower than the amount in 2013. This drop is due to the one-time settlement payment received by 20 settling states and territories from the tobacco companies in 2013 regarding the Non-Participating Manufacturer dispute. This decline was partially offset by a settlement of 2003 disputed payments made to the remaining states. In both cases, this one-time settlement payment was stripped out of the MSA payment amount allocated to each trust for Fitch's modeling purposes. Instead, Fitch assumed that the settling states experienced the same rate of decline as the non-settling states. Since this settlement payment is cash positive, no downgrades will be taken on any bonds issued by settling states or counties which is consistent with the approach taken in 2013.

The full benefit of the settlement payment will be seen next year at which point the ratings will be reevaluated.

There are 38 downgrades taken on bonds from non-settling states. Although the MSA payment was stable year-over-year, many of these downgrades result from having model indicated grades which were below the current rating for two consecutive years. One upgrade is being made on California County Tobacco Securitization Agency (Los Angeles County) Series 2006, which received a settlement in 2013. The remaining 179 outstanding ratings are being affirmed.

Buckeye Tobacco Settlement Financing Authority, 2007 (Ohio), Nassau County Tobacco Settlement Corporation, Tobacco Settlement Asset-Backed Bonds, Series 2006 continue to have debt service reserve balances below their required levels. Suffolk Tobacco Asset Securitization Corporation, Tobacco Settlement Asset-Backed Bonds, Series 2008 is drawing on its reserve account for the first time. As a result, Fitch does not give them the benefit of a rating one notch above the model indicated grade regardless of whether the state received a settlement. Golden State Tobacco Securitization Corporation, United States, Series 2007-1 had been drawing on its reserve account in the past, but now is at its required level.

Fitch uses its breakeven model to analyze tobacco performance. The breakeven model assesses how much the MSA payment received by the trust could decline for each bond to pay at the legal final maturity date. The amount of the latest MSA payment that the transaction has received, the capital structure, the reserve account, and the bond's legal final dates are the key inputs to the model.

Since the tenor of these transactions is typically long and the cash flows can be unpredictable, qualitative adjustments may be taken to avoid rating volatility by requiring two years of consecutive model outputs in order to downgrade to the model implied output. However, if more than one notch difference exists between the current rating and the model implied rating, the bond will be downgraded to one notch above the model output. Tobacco ratings are capped at 'BBB+sf', based on Fitch's opinion of the strength of the tobacco industry. All bonds with model outputs 'bbb+' and below have a Negative Outlook to address concern over a future deterioration in cash flows.

See the web file titled 'Fitch Completes U.S. Tobacco Portfolio Review' for a full list of breakeven multiples.

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