NEW YORK--(BUSINESS WIRE)--Fitch Ratings affirms 11 and downgrades two classes from Children's Trust Fund Tobacco Settlement (Puerto Rico) asset-backed bonds series 2002, 2005 and 2008, as follows:
Tobacco Settlement asset-backed bonds current interest serial bonds
--$11,315,000 due May 15, 2010 affirmed at 'BBB+'; Outlook Stable;
--$4,000,000 due May 15, 2011 affirmed at 'BBB+'; Outlook Stable;
--$8,135,000 due May 15, 2011 affirmed at 'BBB+'; Outlook Stable;
--$13,805,000 due May 15, 2012 affirmed at 'BBB+'; Outlook Stable;
--$15,505,000 due May 15, 2013 affirmed at 'BBB+'; Outlook Stable;
--$17,265,000 due May 15, 2014 affirmed at 'BBB+'; Outlook Stable.
Tobacco Settlement asset-backed bonds current interest turbo term bonds
--$471,105,000 due May 15, 2033 affirmed at 'BBB+'; Outlook Stable;
--$310,380,000 due May 15, 2039 affirmed at 'BBB+'; Outlook Stable;
--$296,255,000 due May 15, 2043 affirmed at 'BBB+'; Outlook Stable.
Tobacco Settlement asset-backed bonds capital appreciation bonds
--2005A affirmed at 'BBB'; Outlook Stable;
--2005B affirmed at 'BBB-'; Outlook Positive;
--2008A downgraded to 'BB' from 'BBB-'; Outlook Stable;
--2008B downgraded to 'B+' from 'BB';, Outlook Stable.
The various actions are based on the level of stress each class is able to withstand as indicated by Fitch's new breakeven cash flow model. The model indicates, for each class of bonds, the level of the annual Master Settlement Agreement (MSA) payment percent change the trust would be able to sustain and still pay the bond in full by the legal final date. The base case 'B' corresponds to a 1% increase in the MSA payment received by the trust every year. The 'BBB' category corresponds to an annual MSA payment decline of 1.25%. The cash flow model accounts for the amount of the latest reported MSA payment that the transaction has received, the capital structure, the reserve account, and the bonds' legal final dates.
The bond payments are also tied to the tobacco companies making MSA payments. Tobacco settlement bonds can be rated up to 'BBB+' based on Fitch's view of the whole tobacco industry and the executory nature of the MSA. In the event of a bankruptcy of a tobacco company, Fitch believes there is an incentive for the company to continue to make payments under the MSA.
Although the delinked rating of the serial bonds and 2033 turbo bond suggested by the model are 'A-' or higher, the bonds are being affirmed at the cap rating of 'BBB+' with a Stable Outlook. The 2039 and 2043 turbo bonds are being affirmed at a level consistent with the model output at 'BBB+' with a Stable Outlook. The 2005A capital appreciation bond(CAB) is being affirmed at a level consistent with the model output at 'BBB' with a Stable Outlook. The 2005B CAB is being affirmed at 'BBB' and assigned a Positive Outlook because a relatively stable MSA cash flow in the future is likely to lead to an upgrade of the ratings. The 2008A CAB is being downgraded to 'BB' from 'BBB-' and the 2008B CAB is being downgraded to 'B+' from 'BB'. Both bonds are being assigned a Stable Outlook based on the model output and other qualitative factors.
Children's Trust Fund Tobacco Settlement asset-backed bonds are secured by the pledged payments made under the MSA. The pledged payments consist of Puerto Rico's share of perpetual annual payments and strategic contribution payments by the original participating manufacturers (OPMs) and subsequent participating manufacturers (SPMs). The OPMs at the time of the original agreement were Philip Morris USA, Inc.; R.J. Reynolds Tobacco Company; Brown & Williamson Tobacco Corporation; and Lorillard Tobacco Company. The amount of annual MSA payments received by the trust are mainly affected by the tobacco consumption level and inflation rate, as well as state specific adjustments, as specified in the MSA.