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08 Feb 2001
MOODY'S ASSIGNS RATINGS OF A1 TO ULSTER TOBACCO ASSET SECURITIZATION CORPORATION, TOBACCO SETTLEMENT ASSET-BACKED BONDS, SERIES 2001
Approximately $28.4 Million of Debt Securities Rated.
New York, February 08, 2001 -- Moody's Investors Service assigned ratings of A1 to the $28,352,454.30
Ulster Tobacco Asset Securitization Corporation, Tobacco Settlement
Asset-Backed Bonds, Series 2001. Nicolas Weill,
vice president in the Structured Finance Group, said that the ratings
are based on Moody's (a) projections of domestic tobacco consumption over
the life of the transaction, (b) analysis of the material risks
and (c) evaluation of the structural and legal protections.
SOURCE OF PAYMENT
The Ulster Tobacco Asset Securitization Corporation (UTASC) transaction
involves the pledging of payments owed to the State of New York pursuant
to the Master Settlement Agreement (or the MSA), and assigned to
Ulster County pursuant to the New York Consent Decree. Under the
MSA, which settled litigation between states and territories and
the major US domestic tobacco manufacturers, the states agreed to
suspend their litigation against the "Big Four" domestic tobacco companies
-- Philip Morris, BAT, RJR and Loews --
in exchange for current and future payments to be made to the states based
primarily upon the amount of tobacco sold in the US domestic market.
The negotiations originally involved the Big Four US tobacco companies.
Additional tobacco manufacturers can join in the settlement and thereby
limit their litigation exposure to the states. To date, manufacturers
with over 98% of the domestic market have signed onto the MSA.
Under the MSA, the manufacturers have agreed to make payments to
the states based on their market share. In each case, the
annual payment obligations are the individual obligations of the manufacturers
and therefore no manufacturer is liable for the payment obligations of
The most significant variable in the analysis of this transaction is the
projected domestic tobacco consumption over the 40-year term of
the transaction. Each annual payment due under the MSA is based
on the volume of tobacco sold in the domestic market. Moody's analyzed
the potential declines in consumption including those that could result
from litigation, tax increases and regulatory changes. Moody's
simulated several different scenarios that resulted in cumulative declines
averaging in excess of 80% over the life of the transaction.
Based on this modeling and the structure of the transaction, Moody's
believes that the bonds have a low risk of default consistent with the
Moody's also considered the extent to which the structure of the tobacco
industry and the MSA limit the likelihood that manufacturers who do not
participate in the MSA would be able to capture a significant share of
tobacco sales volume, reducing the payments to the states under
the MSA. There are two primary ways in which manufacturers might
not participate in the MSA: (a) the bankruptcy of a participating
manufacturer and (b) the entry into the market of new manufacturers that
do not join in the MSA. Each of these risks is addressed below.
Bankruptcy Risk of a Participating Manufacturer
Moody's long term unsecured ratings on the big four tobacco companies
(Philip Morris Companies, Inc.: A2; R.J.
Reynolds Tobacco Holdings, Inc.: Baa2, backed
by a guarantee from R.J. Reynolds Tobacco Company;
British American Tobacco plc: A2; and Loews Corporation:
A1) reflect the bankruptcy risk facing each company for the next three
to five years. These ratings reflect concerns about potential litigation
risk and the likelihood that credit issues could result in the bankruptcy
of one or more of these companies. Because the big four tobacco
companies are the largest obligors under the MSA (manufacturing over 90%
of the tobacco consumed domestically) changes in the ratings of these
companies may have an impact on the ratings of bonds backed by payments
under the MSA.
On July 17, 2000, Moody's confirmed the ratings of the four
major tobacco companies despite the verdict in the Engle case.
Moody's also confirmed the stable outlooks of these companies.
Moody's will continue to closely monitor developments in the Engle case.
In addition, Moody's will also monitor whether the well-publicized
Engle decision induces a shift in court sentiments in other cases that
would be adverse to the companies.
The bankruptcy of one or more of the participating manufacturers (PMs)
could result in the disruption of cash flows for a transaction backed
by MSA payments because of a bankruptcy stay pursuant to either a Chapter
7 or Chapter 11 bankruptcy filing. In the event of a bankruptcy
filing by one or more PMs, the bankruptcy court could stay (temporarily
suspend), all payment obligations of the bankrupt. Thus,
the ability of the bankrupt to make any payments pursuant to the MSA for
the duration of the stay could be limited. In order to protect
against this risk, the UTASC transaction contains liquidity in the
amount of 125% of average annual debt service for the bonds.
In the event of a Chapter 11 bankruptcy proceeding, Moody's believes
that the MSA will likely be considered an executory contract (which is
defined as a contract in which both parties have unfulfilled obligations).
As an executory contract, a bankrupt PM must either accept the MSA
and pay amounts due or reject it and lose the benefits provided by the
MSA. If the MSA is rejected by a PM, payments to bondholders
could be reduced because the market share of the bankrupt entity would
no longer be included in the measure of tobacco sales used to compute
the payment obligations under the MSA and would reduce the required payments
by the remaining PMs.
The impact of the reduction in payments caused by a rejection of the MSA
by a bankrupt PM may be limited by the reduction in market share that
a PM would likely experience as it approaches bankruptcy. As a
PM approaches and seeks to avoid bankruptcy, it may attempt to raise
capital though the sale of one or more significant brands. It is
also likely that due to liquidity constraints, a stressed PM will
reduce advertising and promotional activities in support of its brands.
These actions are likely to result in a reduction in the market share
of the affected PM. Because the payment obligations of a PM under
the MSA are based upon each PM's market share, to the extent that
a manufacturer's market share declines as it approaches and enters bankruptcy,
any impact on the issued bonds will be decreased.
In connection with the MSA, the State of New York has passed a Model
Statute that reduces the economic incentive for a tobacco manufacturer
to sell products without acceptance of the MSA. The Model Statute
requires nonparticipating manufacturers to make payments into an escrow
account roughly equal to the required payments under the MSA. These
funds are held by the state and will be used to make payments to potential
plaintiffs in connection with future suits against such nonparticipating
manufacturers. Although there are questions as to the constitutionality
of the Model Statute, at present it acts as an economic equalizer
that reduces the incentive for a nonparticipating manufacturer to reject
the MSA in bankruptcy. In addition, it is likely that in
the context of a Chapter 11 bankruptcy proceeding, the states will
use all means at their disposal to convince the bankrupt to accept the
MSA.. Moody's analysis concluded that in order for the bankruptcy
of a participating manufacturer to affect this transaction a series of
joint events must occur: bankruptcy, retention of market share
by the bankrupt, Model Statute failure, and failure of the
state to take action to cause the bankrupt to affirm the MSA. In
Moody's opinion, the probability of these events happening is extremely
In addition to the bankruptcy of a manufacturer, volume can escape
from the MSA if a new manufacturer gains market share and chooses not
to become a participating manufacturer under the MSA. Moody's believes
that the MSA is a positive settlement for the tobacco industry which removed
the single largest litigation risk facing the industry at a reasonable
cost which was passed on to the consumer. In fact, well over
98% of the tobacco sold in the domestic market is produced by PMs.
It is likely that given the benefits of the MSA and its low cost,
most new market entrants will choose to become PMs. In addition,
the Model Statutes remove the economic advantage for a potential non-participating
manufacturer. Furthermore, even if the Model Statute is no
longer in place, new entrants will have significant incentive to
join the MSA and avoid potential state action against them.
The structure includes two types of bonds: current interest bonds
with final rated maturities of June 2030 and June 2040 and convertible
capital appreciation bonds with final rated maturities of June 2025 and
Current interest bonds will pay interest on June 1 and December 1 of each
year, commencing on June 1, 2001. Convertible Capital
Appreciation Bonds will accrete interest up to June 2004 for the bonds
maturing in 2025, and up to June 2010, for the bonds maturing
in 2040. The Convertible Capital Appreciation Bonds will start
paying current interest starting on December 1 of that year. Thereafter,
interest will be paid on June 1 and December 1of each year.
No principal payments will be made until 2011. Thereafter planned
principal payments will be made to the various bonds, sequentially,
in order of their rated maturity dates and by lot among bonds with the
same maturity dates. Rated principal payments will become due starting
This transaction includes the structural benefits provided by trigger
events which result in the trapping of payments otherwise released to
the holder of the residual certificate upon the occurrence of certain
events. Although In Moody's opinion the absence of principal payment
up to 2011 is an increased risk to the transaction, it is appropriately
covered by the overcollateralization available in the transaction and
the amount of cash flow available to trap additional cash, should
a trigger event occur.
COMPARISON TO PRIOR TRANSACTIONS
The average coverage for the UTASC 2001 bonds is higher than that of previously
A1 rated transactions. However, the higher coverage available
in the first 10 years does not benefit the bondholders as much as in other
transactions since the delayed amortization in the structure makes bonds
issued by UTASC more susceptible to decreases in the level of tobacco
consumption over the life of the transaction. It is only in the
latter years that the transaction will have the real benefit of a higher
Based on the statistical modeling, the structural integrity of the
transaction, and the credit analysis of the tobacco manufacturers
and the US tobacco industry, Moody's believes that the Series 2001
bonds have expected losses consistent with the anticipated ratings of
The complete anticipated rating action is described below:
Issuer: Ulster Tobacco Asset Securitzation Corporation
$11,765,000 Term Current Interest Bonds; Rated
Maturities of June 1, 2030: A1
$10,190,000 Term Current Interest Bonds; Rated
Maturities of June 1, 2040: A1
$3,759,455 Term Convertible Capital Appreciation Bonds;
Rated Maturity Date of June 1, 2025: A1
$2,637,999.30 Term Convertible Capital Appreciation
Bonds; Rated Maturity Date of June 1, 2040: A1
Structured Finance Group
Moody's Investors Service
JOURNALISTS: (212) 553-0376
SUBSCRIBERS: (212) 553-1653
Nicolas S. Weill
VP - Senior Credit Officer
Structured Finance Group
Moody's Investors Service
JOURNALISTS: (212) 553-0376
SUBSCRIBERS: (212) 553-1653
No Related Data.
© 2019 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.
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