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TEXT-Fitch may cut 150 tobacco settlement tranches
July 16, 2012 / 7:59 PM / 5 years ago

TEXT-Fitch may cut 150 tobacco settlement tranches

Link to Fitch Ratings’ Report: Fitch Puts 150 Tobacco Settlement Tranches on Rating Watch NegativeJuly 16 - Fitch Ratings has published a new rating criteria report entitled ‘US Tobacco Settlement ABS Criteria’. The report details Fitch’s approach to rating new tobacco settlement ABS transactions and conducting surveillance of existing ratings. The report is available on Fitch’s web site at ‘’ or by clicking the link above. With the release of the criteria, Fitch has updated the base case assumption for the annual change in the Master Settlement Agreement (MSA) payment to 0% from a 1% increase. This assumption considers the annual decline in the tobacco shipment rate, estimated by Fitch at 3% to 5% annually, and long-term inflation rates subject to the MSA inflation floor of 3%. As a result of the MSA assumption change, Fitch is placing 150 tranches on Rating Watch Negative until all of the outstanding ratings are reviewed using the new assumption. It is expected that most downgrades will be one to two notches. Fitch expects to resolve the RWNs within two to four weeks. Fitch evaluates tobacco ABS structures by using a proprietary breakeven model. The cash flow model output indicates, for each class of bonds, the level of the annual MSA payment percentage change the transaction would be able to sustain and still pay timely interest and the principal in full by the maturity date. Tobacco Settlement ABS are securitizations of the settlement reached by 46 U.S. states in 1998 to not pursue further legal action against the participating tobacco manufacturers for reimbursement of healthcare costs generated by smoking-related diseases. The settlement payments will be made in perpetuity, and over the last 14 years several U.S. states, counties, cities and territories elected to securitize a portion of these payments by issuing bonds with up to 50 years of maturity. Fitch currently has ratings on 230 tranches of Tobacco ABS issued by 38 legal entities.

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