Fitch Completes U.S. Tobacco ABS Portfolio Review
Fitch is placing 66 tranches on Rating Watch Negative due to the pending outcome of the tobacco criteria revision. It is expected that most downgrades will be one to two notches, which could potentially be lower than the current rating floor of 'B-sf'.
There are 10 downgrades, 11 upgrades and 164 affirmations. Although the MSA payment was stable year-over-year, many of these downgrades result from having model indicated grades which were below the current rating for two consecutive years. The upgrades were mostly on California issued trust and Puerto Rico which received a settlement in 2013.
Buckeye Tobacco Settlement Financing Authority, 2007 (Ohio) and Suffolk Tobacco Asset Securitization Corporation, Tobacco Settlement Asset-Backed Bonds, Series 2008 continue to have debt service reserve balances below their required levels. As a result, Fitch does not give them the benefit of a rating one notch above the model indicated grade regardless of whether the state received a settlement. Nassau County Tobacco Settlement Corporation, Tobacco Settlement Asset-Backed Bonds, Series 2006 had been drawing on its reserve account in the past, but is now at its required level.
KEY RATING DRIVERS
Fitch uses its breakeven model to analyse tobacco performance. The breakeven model assesses how much the MSA payment received by the trust could decline for each bond to pay at the legal final maturity date. The amount of the latest MSA payment that the transaction has received, the capital structure, the reserve account, and the bond's legal final dates are the key inputs to the model.
Since the tenor of these transactions is typically long and the cash flows can be unpredictable, qualitative adjustments may be taken to avoid rating volatility by requiring two years of consecutive model outputs in order to downgrade to the model implied output. However, if more than one notch difference exists between the current rating and the model implied rating, the bond will be downgraded to one notch above the model output. Tobacco ratings are capped at 'BBB+sf', based on Fitch's opinion of the strength of the tobacco industry. Bonds with Negative Outlook reflect Fitch's concern over a future deterioration in cash flows based on MSA payment decline breakeven analysis.