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Rating Action:

Moody's takes rating actions on tobacco settlement revenue securitizations

06 Jul 2015

Approximately $5.7 billion of asset-backed securities affected.

New York, July 06, 2015 -- Moody's Investors Service has upgraded fourteen tranches in eight tobacco settlement revenue securitizations and downgraded twelve tranches in five tobacco settlement revenue securitizations. The bonds are backed by payments of major tobacco companies to the issuer states pursuant to the 1998 Master Settlement Agreement (MSA) between certain domestic tobacco manufacturers, 46 states and certain U.S. territories.

The complete rating actions are as follow:

Issuer: Arkansas Development Finance Authority, Tobacco Settlement Revenue Bonds, Series 2001 (Biosciences Institutes and College of Public Health Projects)

Term Bond Class 2, Upgraded to Aa1 (sf); previously on Feb 20, 2014 Upgraded to Aa3 (sf)

Term Bond Class 3, Upgraded to Aa1 (sf); previously on Feb 20, 2014 Upgraded to Aa3 (sf)

Issuer: Buckeye Tobacco Settlement Financing Authority, Tobacco Settlement Asset-Backed Bonds, Series 2007 (State of Ohio)

Series 2007A-1-11 Senior Current Interest Serial Bonds, Upgraded to Aaa (sf); previously on Jul 21, 2014 Upgraded to Aa1 (sf)

Series 2007A-1-12 Senior Current Interest Serial Bonds, Upgraded to Aa1 (sf); previously on Jul 21, 2014 Upgraded to A1 (sf)

Series 2007A-2-1 Senior Current Interest Turbo Term Bonds, Downgraded to Caa1 (sf); previously on Feb 20, 2014 Confirmed at B3 (sf)

Series 2007A-2-2 Senior Current Interest Turbo Term Bonds, Downgraded to Caa1 (sf); previously on Feb 20, 2014 Confirmed at B3 (sf)

Series 2007A-2-3 Senior Current Interest Turbo Term Bonds, Downgraded to Caa1 (sf); previously on Feb 20, 2014 Confirmed at B3 (sf)

Series 2007A-2-4 Senior Current Interest Turbo Term Bonds, Downgraded to Caa1 (sf); previously on Feb 20, 2014 Confirmed at B3 (sf)

Series 2007-A-3 Senior Convertible Capital Appreciation Turbo Term Bonds, Downgraded to Caa1 (sf); previously on Feb 20, 2014 Confirmed at B3 (sf)

Issuer: California County Tobacco Securitization Agency (Los Angeles County Securitization Corporation) Series 2006A Convertible Turbo Bonds

Cl. 2006A-2, Downgraded to B3 (sf); previously on Feb 20, 2014 Confirmed at B2 (sf)

Cl. 2006A-3, Downgraded to B3 (sf); previously on Feb 20, 2014 Confirmed at B2 (sf)

Issuer: California Statewide Financing Authority (Pooled Tobacco Securitization Program) , Series 2002

Ser. 2002A Serial Bonds 13, Upgraded to Aaa (sf); previously on Jul 21, 2014 Upgraded to Aa1 (sf)

Ser. 2002B Serial Bonds 13, Upgraded to Aaa (sf); previously on Jul 21, 2014 Upgraded to Aa1 (sf)

Issuer: Golden State Tobacco Securitization Corporation (2007 Indenture)

CI Bds A-1-12, Upgraded to Aaa (sf); previously on Jul 21, 2014 Upgraded to Aa1 (sf)

CI Bds A-1-13, Upgraded to Aaa (sf); previously on Jul 21, 2014 Upgraded to Aa1 (sf)

Issuer: Michigan Tobacco Settlement Finance Authority, Tobacco Settlement Asset-Backed Bonds, Series 2006 and 2008

Series 2006A Fixed Rate Turbo Term Bonds, Downgraded to B3 (sf); previously on Feb 20, 2014 Confirmed at B2 (sf)

Issuer: New York Counties Tobacco Trust II, Series 2001

Serial Bond Class 11, Upgraded to Aaa (sf); previously on Jul 21, 2014 Upgraded to Aa1 (sf)

Issuer: Northern Tobacco Securitization Corporation, Series 2006

2006-A-2, Downgraded to B3 (sf); previously on Feb 20, 2014 Confirmed at B2 (sf)

2006-A-3, Downgraded to B3 (sf); previously on Feb 20, 2014 Confirmed at B2 (sf)

Issuer: Rensselaer Tobacco Asset Securitization Corporation, Series A

Serial Bond Class 11, Upgraded to Aaa (sf); previously on Jul 21, 2014 Upgraded to Aa1 (sf)

Issuer: The California County Tobacco Securitization Agency ( Fresno County Tobacco Funding Corporation), Series 2002

Ser. 2002 Term Bonds 1, Upgraded to Aa1 (sf); previously on Feb 20, 2014 Upgraded to A1 (sf)

Issuer: Tobacco Settlement Financing Corporation (New Jersey), Series 2007-1

2007-1A Serial Bond 10, Upgraded to Aaa (sf); previously on Jul 21, 2014 Upgraded to Aa1 (sf)

2007-1A Serial Bond 11, Upgraded to Aa3 (sf); previously on Feb 20, 2014 Upgraded to A1 (sf)

2007-1A Serial Bond 12, Upgraded to A1 (sf); previously on Feb 20, 2014 Upgraded to A3 (sf)

2007-1A Term Bond 4, Downgraded to B3 (sf); previously on Feb 20, 2014 Confirmed at B2 (sf)

2007-1A Term Bond 5, Downgraded to B3 (sf); previously on Feb 20, 2014 Confirmed at B2 (sf)

RATINGS RATIONALE

The upgraded tranches are either fully supported or predominantly supported by cash in the respective transactions' reserve accounts. In addition, these tranches benefit from relatively short-term maturities. These structural features minimize the impact of the potential cigarette consumption declines over the long term, where even significant declines not disrupting timely payments of interest and principal to the bond-holders.

The downgrades reflect the continuous decline in cigarette consumption and weaker credit profile of a major tobacco company, Reynolds American Inc. Domestic cigarette shipment volume, which is a proxy for cigarette consumption, declined almost every year since 2000. During 2014 domestic cigarette shipment volume declined by an additional approximately 3.8%. The downgraded lower-priority tranches are especially sensitive to the consumption declines and could default on the final maturity dates if cigarette consumption continues to decline at our projection of 3%-4% per year.

In addition, Reynolds American Inc. acquired Lorillard, Inc. in June 2015. Both of these companies are signatories of the MSA. The acquisition weakened the credit profile of Reynolds and Moody's downgraded its senior unsecured rating to Baa3 from Baa2. The downgrade of Reynolds has a negative impact on all tobacco settlement bonds, particularly tranches with lower payment priorities. Furthermore, the acquisition moderately increased payor concentration risk for all tobacco settlement bonds. While before the acquisition, Reynolds' payments represented approximately 25% of the total revenue to the tobacco settlement bonds, after the acquisition, its proportionate share of payments increased to 33%.

Methodology Underlying the Rating Actions

The principal methodology used in these ratings was "Moody's Approach to Rating Tobacco Settlement Revenue Securitizations" published in February 2014. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

Factors that would lead to an upgrade or downgrade of the rating:

Moody's could upgrade the ratings if the annual rate of cigarette consumption decline slows down. Conversely, Moody's could downgrade the ratings if the annual rate of decline in the volume of domestic cigarette shipments increase beyond the 3%-to-4% base case projection or if an arbitration panel finds that a state that has not settled its NPM adjustment dispute was not diligent in enforcing a certain statute, which could lead to a significant decline in cash flow to that state.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions of the disclosure form.

The analysis relies on a Monte Carlo simulation that generates a large number of collateral loss or cash flow scenarios, which on average meet key metrics Moody's determines based on its assessment of the collateral characteristics. Moody's then evaluates each simulated scenario using model that replicates the relevant structural features and payment allocation rules of the transaction, to derive losses or payments for each rated instrument. The average loss a rated instrument incurs in all of the simulated collateral loss or cash flow scenarios, which Moody's weights based on its assumptions about the likelihood of events in such scenarios actually occurring, results in the expected loss of the rated instrument.

Moody's quantitative analysis entails an evaluation of scenarios that stress factors contributing to sensitivity of ratings and take into account the likelihood of severe collateral losses or impaired cash flows. Moody's weights the impact on the rated instruments based on its assumptions of the likelihood of the events in such scenarios occurring.

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Jinyang Wang
Asst Vice President - Analyst
Structured Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Irina Faynzilberg
VP - Sr Credit Officer/Manager
Structured Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's takes rating actions on tobacco settlement revenue securitizations
No Related Data.
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