NEW YORK--(BUSINESS WIRE)-- Fitch Ratings assigns an 'AA-' rating to the following Tobacco Settlement Financing Corporation (State of New York) asset-backed revenue bonds:
--$419,765,000 asset-backed revenue bonds, series 2011A (state contingency contract secured);
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--$555,790,000 asset-backed revenue bonds, series 2011B (state contingency contract secured).
The bonds, which are being issued to refund certain outstanding 2003 bonds for debt service savings, are expected to sell via negotiation the week of June 27, 2011.
Fitch also affirms the 'AA-' rating on the corporation's approximately $2.8 billion in outstanding state contingency contract secured asset-backed revenue bonds.
The Rating Outlook is Positive.
RATING RATIONALE:
--The 'AA-' rating assigned to the bonds is based on the credit quality of the State of New York (general obligations rated 'AA' with a Positive Outlook by Fitch Ratings). Although pledged tobacco settlement revenues are the expected source of payment, ultimate security rests on the availability of state appropriations for debt service pursuant to contingency contracts with the state of New York.
--Per the contingency contracts, the state budget director covenants to annually include a request for funding in the state budget equal to debt service on the bonds, which is subject only to appropriation. Due to the need for annual state legislative appropriation, the rating is one notch below the state's GO rating.
--New York's economy is broad, with substantial wealth and resources, although the health of the state's economy and finances is closely linked to the cyclical financial services industry.
--Strong financial planning and reporting practices, including quarterly financial plan updates, allow the state to stay abreast of changing conditions.
--New York's debt burden is above average but still in the moderate range, and pensions are well funded.
--The Positive Outlook on New York State GO and related debt reflects actions in recent budgets to identify sustainable solutions to significant budgetary challenges, a notable change from the historical tendency to rely on nonrecurring measures to address weakening in the state's somewhat volatile revenue stream during downturns.
WHAT COULD TRIGGER AN UPGRADE?
--Regarding the TSFC bonds, changes in New York state's general obligation (GO) rating, to which these ratings are linked.
--The state's GO rating will be driven by the ability of the state to achieve the spending targets in the fiscal 2012 budget and evidence of sustainability of the ongoing funding plan for Medicaid and schools.
SECURITY:
Pledged tobacco settlement revenues are the expected source of payment; however, ultimate security and the assigned rating rests on contingency contracts with the state of New York whereby shortfalls in debt service would be paid by the state, subject to annual appropriation.
CREDIT SUMMARY:
The 'AA-' rating is based on the credit quality of the state of New York (GO bonds rated 'AA' with a Positive Outlook by Fitch). Although pledged tobacco settlement revenues are the expected source of payment, pursuant to contingency contracts the state budget director annually includes a request in the state budget for an appropriation equal to debt service on the bonds. Subject to such appropriation, if on the fifth day preceding a debt service payment date there are insufficient funds from the pledged settlement payments or the indenture accounts, including the debt service reserve accounts, the state agrees to pay the debt service due. The series A debt service reserve account, totaling $227,545,572, was funded from proceeds of the series 2003A bonds. The series B debt service reserve account, totaling $221,582,344, was funded from proceeds of the series 2003B bonds.
Pursuant to a purchase and sale agreement dated June 1, 2003, the state sold to the corporation pledged settlement payments consisting of 50% of its share of tobacco settlement revenues received under the master settlement agreement (MSA) which provide security for bonds issued under the indenture dated June 1, 2003, as supplemented (series A bonds). The state's remaining 50% share, sold to the corporation pursuant to purchase and sale agreement dated Dec. 1, 2003, provides security for bonds issued under the indenture dated December 1, 2003, as supplemented (series B bonds). Both series of bonds are separately secured, and under each indenture, the corporation assigns and pledges the sold settlement payments to the trustee, which are received directly, by-passing the state. Tobacco settlement payments are distributed each year through the MSA escrow agent on April 15. The pledged settlement payments are not be subject to legislative appropriations. Excess revenues are retained and used for debt service or debt retirement. Additional parity bonds can only be issued for refunding purposes.
As additional security, the State of New York, acting through the budget director, entered into two contingency contracts with the corporation to provide for shortfalls. The corporation covenants to request from the state by no later than Dec. 15 each year, and certify the amount of, the debt service due on the bonds in the following fiscal year, which begins April 1. The state covenants to request the appropriation in the state budget. This request is included in the debt service budget bill along with appropriations for other state debt.
Debt service is due each June 1 and Dec. 1. While the state's payment requires annual legislative appropriations, once in place the state's obligation to fund the debt service requirement is absolute and unconditional. The state has demonstrated its ability to offset late budget adoption risk by consistently appropriating for debt service on all its appropriation-backed debt obligations, including contract debt, on a timely basis separate from the budget process. State contracts have been the basis for security in other financings of the state and the vast majority of the state's tax supported debt is secured by appropriations, rather than its general obligation, thereby minimizing appropriation risks. Only about 7% of state debt is GO.
New York's 'AA' GO rating is based on the state's substantial wealth and resources and broad economy, and also recognizes the outsized role that the financial services industry plays in the state's economy and revenue system. State net tax-supported debt levels have been relatively stable as a percentage of personal income and are expected to remain above average but still in the moderate range. Pensions are well funded. Although the state's financial position was strained in the recent downturn, the approach to budgeting became more proactive and focused on structural solutions than was the case in the past. The enacted budget for fiscal 2012, with its focus on recurring actions to resolve gaps and ongoing expenditure control mechanisms for Medicaid and school aid, continues the notable change from budgeting in prior downturns and is a credit positive, particularly given the magnitude of the shortfall that the state confronted for the year as federal stimulus funds phase out. The focus for the credit will now turn to the state's ability to achieve the spending control goals, and whether they are sustainable.
For more information on the state's 'AA' general obligation rating and Positive Rating Outlook, see Fitch Research 'Fitch Revises Outlook on New York State GO and Related Debt to Positive from Stable' dated May 31, 2011.
Additional information is available at 'www.fitchratings.com'.
In addition to the sources of information identified in Fitch's report 'Tax-Supported Rating Criteria', this action was additionally informed by information from the underwriter and IHS Global Insight.
Applicable Criteria and Related Research:
--'Tax-Supported Rating Criteria' (Aug. 16, 2010);
--'U.S. State Government Tax-Supported Rating Criteria' (Oct. 8, 2010). Enditem
