NEW YORK--(EON: Enhanced Online News)--Kroll Bond Rating Agency (KBRA) assigns ratings to four classes of Tobacco Settlement Asset-Backed Bonds, Series 2006 (the “Bonds”) issued by District of Columbia Tobacco Settlement Financing Corporation (the “Corporation”).
The Bonds represent the second series issued by the Corporation, and are structurally subordinated to the Corporation’s Series 2001 Bonds. The Series 2006 Bonds are secured by payments made by the tobacco participating manufacturers under the Master Settlement Agreement (“MSA”) and which are no longer subject to the lien of the 2001 transaction indenture. There are approximately $352.7 million of Series 2001 Bonds currently outstanding. The Series 2001 Bonds require payments of redemption amounts which the Corporation are obligated to make. In the event that the Corporation is unable to make its Series 2001 redemption payments, any such unpaid amounts will be paid on subsequent payment dates until all unpaid redemption amounts have been made. The Series 2006 Bonds will not receive payments until the Corporation has made all current and past due redemption amounts related to the Series 2001 Bonds.
In November 1998, the MSA was entered into between 46 US states, the District of Columbia (the “District”), several US territories and the then four largest US tobacco manufacturers, known as the original participating manufacturers (“OPMs”). Numerous smaller tobacco manufacturers joined the MSA after the OPMs, and are referred to as subsequent participating manufacturers (“SPMs”). There are tobacco manufacturers that did not become parties to the MSA, and such firms are known as the Non-Participating Manufacturers (“NPMs”). The MSA resolved cigarette smoking-related litigation among the settlement states and the participating manufacturers, consisting of both the OPMs and the SPMs (collectively, the “PMs”), and provides those states with annual tobacco settlement payments from the PMs in perpetuity. After the MSA was signed, many states and local governments securitized some or all of their rights to receive future settlement payments.
Under the MSA, payments to the states are subject to various adjustments, including the inflation adjustment, volume adjustment, and NPM adjustment. The inflation adjustment increases the base amounts of the MSA payments, based on the higher of the percentage increase in the Consumer Price Index for All Urban Consumers and 3%. The volume adjustment increases or decreases the MSA payments by an amount that accounts for fluctuations in the number of cigarettes shipped by the OPMs in or to the United States. The NPM adjustment may reduce the payments of the PMs under the MSA in the event of losses in market share by the PMs to NPMs as a result of such PMs’ participation in the MSA.
Under the MSA, three conditions must be met in order to trigger an NPM adjustment: 1) a market share loss was experienced for the applicable year; 2) a nationally recognized firm of economic consultants determines that the disadvantages experienced as a result of provisions of the MSA were a significant factor contributing to the market share loss for the applicable year; and 3) the settling state in question are found to not have diligently enforced their qualifying states. The PMs have disputed MSA payments related to sales years dating back to 2003.
In December 2012, terms of a settlement agreement were agreed to by a number of US states, the District, Puerto Rico, the OPMs and certain SPMs regarding claims related to the 2003 – 2012 NPM adjustments and determination of subsequent NPM adjustment. Under this settlement term sheet, OPMs and certain SPMs had received certain reductions in 2013 and 2014 and will receive reductions to subsequent MSA payments in the form of credits and transition year reductions. Each of the signatories to the settlement term sheet has received its allocable share from the disputed payments account under the MSA in connection with its 2013 MSA payment. The settlement term sheet also details the determination of NPM adjustments for 2013 onward for the signatory states. Further, the settlement term sheet provides that the signatory states and the signatory PMs will split the amounts at issue under the provisions relating to NPM sales for which state cigarette excise tax was not paid (Non-SET-Paid), for 2015 and each subsequent year on a 50-50 basis.
KBRA considered several key factors in its analysis of this transaction, including:
- The structural subordination of the Bonds to the Series 2001 Bonds.
- The credit quality of the large tobacco participating manufacturers, which has strengthened in recent years.
- Recent normalization of tobacco consumption decline following several years of above-average declines.
- The December 2012 settlement term sheet as it relates to the signatory jurisdictions, including the District.
- The popularity of current and future tobacco alternatives, including E-cigarettes, and their market acceptance and penetration.
- The potential for litigation that may have a material impact on the PMs or the MSA.
- Other potential risks to demand, including reduction in discretionary income and other recessionary patterns that may have a meaningful impact on tobacco consumption.
KBRA analyzed the transaction using KBRA’s General Rating Methodology for Asset-Backed Securities published on July 30, 2012. Under the base case scenario, the Series 2006A received only a portion of its principal by its maturity date, while the Series 2006B, Series 2006C and Series 2006D did not receive any of its principal by its respective maturity dates.
|Series and Class||Rating||
Initial Principal Balance
|Series 2006A||CCC (sf)||$145,481,196|
|Series 2006B||CCC (sf)||$14,251,650|
|Series 2006C||CCC (sf)||$55,868,400|
|Series 2006D||CCC (sf)||$32,662,800|
Related Publications: (available at www.kbra.com)
Follow us on Twitter!
About Kroll Bond Rating Agency
KBRA is registered with the U.S. Securities and Exchange Commission as a Nationally Recognized Statistical Rating Organization (NRSRO). In addition, KBRA is recognized by the National Association of Insurance Commissioners (NAIC) as a Credit Rating Provider (CRP).