MOODY'S ASSIGNS RATINGS of A1, A2, AND A3 to NASSAU COUNTY TOBACCO SETTLEMENT CORPORATION, TOBACCO SETTLEMENT ASSET-BACKED BONDS, SERIES A
Moody's Investors Service assigned ratings of A1, A2, and A3 to the Nassau CTSC Tobacco Settlement Asset-Backed Bonds, Series A. Michael Kanef, vice president in the Structured Finance Group said that the ratings were based on Moody's (a) projections of domestic tobacco consumption over the life of the transaction, (b) analysis of the material risks to the transaction and (c) evaluation of the structural and legal protections in the transaction. The ratings address the timely payment of interest and principal, including payments of sinking fund installments.
SOURCE OF PAYMENT
The Nassau CTSC transaction involves the securitization of a portion of the payments owed to New York State under the Master Settlement Agreement (or the MSA), which settled litigation between states and territories and the major US domestic tobacco manufacturers. This transaction is backed by those amounts allocated to Nassau County and is the second transaction backed by payments allocable to New York State. The NYC TSASC transaction which Moody's rated Aa1, Aa2 and Aa3 was analyzed using a similar framework.
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 that could arise from various risk factors to the transaction, including potential litigation, tax increases and potential regulatory issues. 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 assigned ratings.
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. 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 who do not join in the MSA.
Moody's corporate ratings on the Big Four tobacco companies reflect the bankruptcy risk facing each company for the next three to five years. These ratings reflect concerns regarding potential litigation risk and the likelihood that credit issues could result in the bankruptcy of one or more of these companies.
Moody's analysis concluded that in order for the bankruptcy of a participating manufacturer to affect this transaction one needs a series of joint events: 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. This series of events has a probability consistent with the assigned ratings.
In addition to a bankruptcy of a manufacturer, volume can escape from the MSA due to the appearance of a new manufacturer that does not join the settlement agreement. The model statutes remove any economic advantage for non-participating manufacturers. 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.
Moody's considered the additional benefit of structural triggers in assigning the ratings to the bonds. The triggers result in the trapping of payments otherwise released to the county, upon the occurrence of one or more events. The triggers are based on volume declines and challenges to the model statutes and provide additional protection to bondholders.
DEBT SERVICE COVERAGE LOWER THAN NYC'S TSASC TRANSACTION
Debt service coverage in the Nassau CTSC transaction is lower than the coverage in the NYC TSASC transaction based upon projected volume declines. The Nassau transaction is therefore more susceptible to decreases in the level of tobacco consumption in the domestic United States over the life of the transaction. In addition, there is a correspondingly lower level of residual cash flow that limits the value of the transaction's triggers. However, based on the statistical modeling, the structural integrity of the transaction including the benefit of the triggers, and the qualitative analysis of the tobacco manufacturers and the US tobacco industry, Moody's believes that this transaction has an expected loss consistent with the A1, A2, and A3 ratings that were assigned.
The complete rating action was as follows:
Issuer: Nassau CTSC, a local development corporation organized under the Not-For-Profit Corporation Law of the State of New York.
$294.5 million Tobacco Settlement Asset-Backed Bonds, Series A
Principal Amount Rating.....Rated Maturity Date, July 15.....Planned Principal Payment Date, July 15.....Interest Rate
$56,820,000 6.500% Sinking Fund Term Bonds, Rated Maturity Date of July 15 2027:.....A2
$80,135,000 6.400% Sinking Fund Term Bonds, Rated Maturity Date of July 15 2033:.....A3
$85,185,000 6.600% Sinking Fund Term Bonds, Rated Maturity Date of July 15 2039:.....A3
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