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Rating Action:

Moody's upgrades and reviews for upgrade select tranches across six tobacco settlement revenue securitizations

14 May 2012

Approximately $229 million of asset backed securities affected.

New York, May 14, 2012 -- Moody's has upgraded nine tranches in five securitizations of Tobacco Settlement Revenue bonds and put on review for a possible upgrade one tranche. The bonds are securitizations of payments owed to the issuers pursuant to the Master Settlement Agreement (MSA) between certain domestic tobacco manufacturers and 46 states and certain territories.

RATINGS RATIONALE

The primary reason for the upgrades is the 2011 annual cigarette shipment decline of approximately 3%, reported by the National Association of Attorneys General (NAAG) on April 6, 2012. The reported decline is on the lower side of our projected cigarette consumption decline of 3% to 4% per year and lower than our modeled mean decline of 4% per year, specified in our principal methodology published on May 25, 2011. The calculation of annual MSA payments to the states uses the previous year's cigarette consumption information. Therefore, the 2011 consumption data caused slightly greater than expected payments and, consequently, greater than expected amortization of the bonds. The affected tranches are senior in the respective capital structures in terms of their scheduled maturities, excluding the bonds that have been previously upgraded to A1 (sf), and as such are the most sensitive to moderate changes in performance. As we mentioned in the press release as of September 8 2011, a structural feature of some deals related to a change in the allocation of funds upon an event of default from sequential to pro-rata, limits the ratings of such bonds to A1 (sf).

In addition, the market share of the participating manufacturers (PMs) that make MSA payments to the states increased to 94.35% from 93.50% The increased market share of PMs and, consequently, a lower market share of the Non-Participating Manufacturers (NPMs) that do not make the payments, has lowered the NPM Adjustment to 9.76% from 12.26% in the previous year. A lower NPM Adjustment will lead to less funds being withheld or escrowed by the PMs, and more funds distributed to the states and tobacco settlement securitizations.

The better than expected cigarette consumption and market share data for 2011 more than offset a slightly negative impact from the correction of a modeling error made in our cash flow analyses performed for the rating actions published on September 8, 2011. The error was related to the coding of the truncated normal distribution used to project cigarette consumption in our modeling analyses. Today's rating actions reflect the corrected modeling.

We have put under review for a possible upgrade one tranche in the Tobacco Settlement Financing Corporation of Rhode Island. While the credit quality of the bond also benefits from the latest cigarette consumption and market share data, the full and timely repayment of the bond relies in part on a guaranteed yield on cash in the reserve account pursuant to the Debt Service Reserve Fund Agreement (DSRFA) with an affiliate of, and guaranteed by, Morgan Stanley. Morgan Stanley's A2 and P-1 ratings are currently under review for a possible downgrade. A downgrade would reduce its ability to make the guaranteed payments to the state of Rhode Island and as such may offset the benefits of the stronger than expected cigarette consumption and market share data. During the review period we will monitor the outcome of the current ratings review of Morgan Stanley.

In assigning the ratings Moody's conducted cash flow simulation analyses using assumptions published in the methodology entitled "Moody's Approach to Rating Tobacco Settlement Revenue Securitizations" published on May 25, 2011. Please see the Credit Policy page on www.moodys.com for a copy of this and other methodologies. Among other factors, Moody's considered the internal rate of return, the probability of default, and the expected loss on the bonds. In all cases, Moody's assumed that the portion of MSA payments either withheld or escrowed by the tobacco manufacturers that are party to MSA (NPM adjustments) will continue until 2020 and reduce the MSA payments by 13% per year. Moody's also assumed that the settling states would ultimately fully recover the withheld or escrowed disputed funds. Should the tobacco manufacturers prevail, however, such an outcome would materially reduce future cash flow to the affected states, which could result in further downgrades to their bonds.

In addition to the quantitative factors, Moody's considered qualitative factors. Such factors included the structural protections in each transaction, the breakeven cigarette consumption declines for each rated tranche and recent deal performance indicators, including debt service coverage ratios, interest coverage ratios, and the transactions' leverage.

Primary sources of uncertainty include future trends in domestic cigarette consumption, the domestic market share of the tobacco manufacturers who are parties to the MSA, as well as the market share split between major and minor tobacco manufacturers. In addition, Moody's published methodology includes an assumption that inflation remains at the 3% minimum for the term of the bonds. Therefore, inflation above the 3% minimum could result in the increase of the MSA payment revenue.

The complete rating actions are as follows:

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

Series 2007A-1-8 Senior Current Interest Serial Bonds, Upgraded to Aaa (sf); previously on Sep 8, 2011 Upgraded to Aa1 (sf)

Series 2007A-1-11 Senior Current Interest Serial Bonds, Upgraded to A1 (sf); previously on Sep 8, 2011 Upgraded to A3 (sf)

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

Ser. 2002A Serial Bonds 13, Upgraded to A2 (sf); previously on Sep 8, 2011 Upgraded to Baa1 (sf)

Ser. 2002B Serial Bonds 13, Upgraded to A2 (sf); previously on Sep 8, 2011 Upgraded to Baa1 (sf)

Issuer: Golden State Tobacco Securitization Corporation (2007 Indenture)

CI Bds A-1-10, Upgraded to A1 (sf); previously on Sep 8, 2011 Upgraded to A3 (sf)

CI Bds A-1-11, Upgraded to A2 (sf); previously on Sep 8, 2011 Upgraded to Baa1 (sf)

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

Ser. 2002 Term Bonds 2, Upgraded to A3 (sf); previously on Sep 8, 2011 Upgraded to Baa1 (sf)

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

2007-1A Serial Bond 10, Upgraded to A2 (sf); previously on Sep 8, 2011 Upgraded to A3 (sf)

2007-1A Serial Bond 11, Upgraded to A3 (sf); previously on Sep 8, 2011 Upgraded to Baa1 (sf)

Issuer: Tobacco Settlement Financing Corporation, Series 2002A and 2002B (Rhode Island)

Ser. 2002A Tax-Exempt Term Bond 1, Baa1 (sf), Placed Under Review for Possible Upgrade; previously on Sep 8, 2011 Upgraded to Baa1 (sf)

REGULATORY DISCLOSURES

The Global Scale Credit Ratings on this press release that are issued by one of Moody's affiliates outside the EU are endorsed by Moody's Investors Service Ltd., One Canada Square, Canary Wharf, London E 14 5FA, UK, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that has issued a particular Credit Rating is available on www.moodys.com.

For ratings issued on a program, series or category/class of debt, this announcement provides relevant 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 relevant 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 relevant 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.

Information sources used to prepare each of the ratings are the following: parties involved in the ratings, parties not involved in the ratings, public information, confidential and proprietary Moody's Investors Service information.

Moody's did not receive or take into account a third-party assessment on the due diligence performed regarding the underlying assets or financial instruments related to the monitoring of this transaction in the past six months.

Moody's considers the quality of information available on the rated entities, obligations or credits satisfactory for the purposes of issuing these ratings.

Moody's adopts all necessary measures so that the information it uses in assigning the ratings is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Please see the ratings disclosure page on www.moodys.com for general disclosure on potential conflicts of interests.

Please see the ratings disclosure page on www.moodys.com for information on (A) MCO's major shareholders (above 5%) and for (B) further information regarding certain affiliations that may exist between directors of MCO and rated entities as well as (C) the names of entities that hold ratings from MIS that have also publicly reported to the SEC an ownership interest in MCO of more than 5%. A member of the board of directors of this rated entity may also be a member of the board of directors of a shareholder of Moody's Corporation; however, Moody's has not independently verified this matter.

Please see Moody's Rating Symbols and Definitions on the Rating Process page on www.moodys.com for further information on the meaning of each rating category and the definition of default and recovery.

Please see ratings tab on the issuer/entity page on www.moodys.com for the last rating action and the rating history.

The date on which some ratings were first released goes back to a time before Moody's ratings were fully digitized and accurate data may not be available. Consequently, Moody's provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

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.

David Nathanson
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 - Senior Credit Officer
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 upgrades and reviews for upgrade select tranches across six tobacco settlement revenue securitizations
No Related Data.
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