NEW YORK--(BUSINESS WIRE)--Fitch Ratings assigns a 'BBB+' rating to the following Golden State Tobacco Securitization Corporation (GSTSC) bonds:
--$372.02 million enhanced tobacco settlement asset-backed bonds, series 2013A.
The series 2013A bonds are scheduled to be sold via negotiated sale on April 2.
In addition, Fitch affirms the 'BBB+' rating on $3.1 billion in outstanding GSTSC enhanced tobacco settlement asset-backed bonds.
The Rating Outlook is Positive.
SECURITY
Limited obligations of GSTSC secured by tobacco settlement revenues and other pledged receipts, including a state enhancement in the form of a covenant to seek annual appropriations for debt service in the event of a deficiency in other pledged receipts.
KEY RATING DRIVERS
RATING BASED ON STATE APPROPRIATION: The security for enhanced tobacco bonds derives from the covenant that the state director of finance will request that the governor include in the annual state budget an appropriation for the full amount of debt service and operating expenses due in the next fiscal year. Thus, the rating is based on the credit quality of the state of California, whose general obligation bonds are rated 'A-' with a Positive Outlook by Fitch.
STATE'S POSITIVE OUTLOOK LINKED TO FISCAL PROGRESS: The Positive Outlook on California's GO and related debt reflects the fiscal management improvements instituted by California in recent years, which when combined with two successive years of structural budget progress have enabled the state to materially reduce budgetary debt. Eventual rating action would be linked to the state's willingness to restrain spending growth and progress reducing budgetary obligations.
CALIFORNIA'S GENERAL CREDIT QUALITY: The bonds are rated one notch below California's GO rating. Despite Fitch's expectation that the state's fiscal situation will improve, California's credit standing is likely to remain lower than most states for the foreseeable future given the magnitude of the state's budgetary and financial challenges. The rating will continue to incorporate the size and breadth of the state's economy and tax base and the strengths inherent in a state's broad powers.
RATING SENSITIVITIES
The rating is sensitive to changes in the GO rating of the State of California, to which this rating is linked.
CREDIT PROFILE
The rating for California's enhanced tobacco settlement bonds is based on the state's covenant to seek an annual appropriation for debt service and operating expenses. Although the primary source of bond repayment is expected to be tobacco settlement revenues pledged to bondholders, the pledge to bondholders also includes funds received pursuant to the state appropriation.
Consequently, the 'BBB+' rating is one notch below the GO rating of the state of California, currently 'A-' with a Positive Outlook. The rating for the enhanced tobacco settlement bonds is on par with that of other state appropriation-backed debt.
The GSTSC, a special purpose trust, originally sold tobacco settlement bonds in 2003 to provide one-time resources for the state general fund under two separate, parity indentures. The master indenture for series 2003B, to which 43.43% of the state's future tobacco settlement revenues under the master settlement agreement are pledged, was enhanced with the state appropriation backup; other GSTSC bonds originally issued under a separate 2003A master indenture do not carry the state appropriation enhancement. The current sale will refund $420 million of the outstanding $3.14 billion in enhanced tobacco bonds outstanding under the 2003B master indenture.
The pledge to bondholders under the enhanced indenture includes tobacco settlement receipts, a liquidity reserve with a required balance of $214 million, a supplemental reserve with a required balance of $32 million, and proceeds of state appropriations. Any surplus funds are available for early repayment of the bonds. Under the bond documents, the GSTSC is required to notify the state by Nov. 1 each year, in time for budget formulation, of the debt service and operating expenses due in the following fiscal year. The state covenants that the director of finance will request that the governor include an appropriation for the succeeding year's debt service and operating expenses, and that the governor in each year will request such an appropriation from the legislature. The state's annual budgets have included the appropriation since fiscal 2004.
No later than May 5 each year, the GSTSC will certify any deficiency between the tobacco settlement revenues received by April 30, plus any other amounts available for operating expenses or debt service in trustee accounts, including the reserves and surplus account, and the debt service and operating expenses due in the next 12 months. If needed, state appropriations will be disbursed to the trustee no later than five days before the next debt service payment date. Debt service is due June 1 and Dec. 1, and the state's fiscal year commences July 1.
Due to reduced cigarette consumption and legal disputes affecting tobacco settlement revenues, the trustee drew from the supplemental reserve in 2011 and 2012, reducing its balance by $7.9 million, to $24 million. The current refunding transaction will provide debt service savings in the near term and is expected to allow pledged receipts to replenish the supplemental reserve to the required level.
For additional information on the State of California, please see Fitch's rating action commentary, 'Fitch Revises California GO Outlook to Positive; Affirms 'A-' Rating,' dated March 4, 2013, at www.fitchratings.com.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
In addition to the sources of information identified in the Tax-Supported Rating Criteria, this action was additionally informed by information from IHS Global Insight.
Applicable Criteria and Related Research:
--'Tax-Supported Rating Criteria' (Aug. 14, 2012);
--'U.S. State Government Tax-Supported Rating Criteria' (Aug. 14, 2012).
Applicable Criteria and Related Research
Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015
U.S. State Government Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686033
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