Link to Fitch Ratings' Report: Fitch Completes U.S. Tobacco Portfolio Review
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=687359
Fitch Ratings has completed the review of its tobacco portfolio accounting for the amount of Master Settlement Agreement (MSA) payment received by each trust in 2012. For 2012, the aggregate MSA payment was 1.97% higher than the amount in 2011. Fitch published updated Tobacco Settlement ABS Criteria on July 16, 2012, which included a change in the base case assumption for the MSA payment from +1% to 0%. The rating scale was recalibrated to reflect this change, and as a result there were several downgrades. The downgrades were taken on turbo and capital appreciation bonds (CABs), which are typically subordinated and more leveraged. No serial bonds were downgraded.
There were 74 downgrades resulting solely from changes in the criteria. For these bonds the breakeven output actually increased since last year. The other 10 downgrades resulted from continued performance deterioration. All of the performance downgrades were capital appreciation bonds.
Three tobacco transactions, Buckeye Tobacco Settlement Financing Authority, 2007 (Ohio); Golden State Tobacco Securitization Corporation, UNITED STATES Series 2007-1; and Niagara Tobacco Asset Securitization Corporation are not being reviewed at this time. These transactions have drawn on their reserve accounts below the required minimum balance and require additional analysis.
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 these transactions have a long life 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 carry 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, available at 'www.fitchratings.com'.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'U.S. Tobacco Settlement ABS Criteria' (July 16, 2012);
--'Global Structured Finance Rating Criteria'(June 6, 2012).
Applicable Criteria and Related Research:
U.S. Tobacco Settlement ABS Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=682015
Global Structured Finance Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=679923
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