Fitch Rates Golden State Tobacco Securitization Corp., CA $1.7B Bonds 'A'; Outlook Stable

NEW YORK--()--Fitch Ratings assigns an 'A' rating to the following Golden State Tobacco Securitization Corporation (GSTSC) CA bonds:

--$1.7 billion enhanced tobacco settlement asset-backed bonds, series 2015A.

The series 2015A bonds are scheduled to be sold via negotiated sale on or about the week of March 23, 2015.

The Rating Outlook is Stable.

SECURITY

Limited obligations of GSTSC secured by tobacco settlement revenues and other pledged receipts, including a state enhancement in the form of a pledge 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 to include in the annual state budget an appropriation for debt service and operating expenses due in the next fiscal year. Since 2004, the state budget has appropriated a nominal amount with authority to fully fund without further legislative approval. Thus, the rating is based on the credit quality of the state of California.

RECENT STATE GO UPGRADE: Institutionalized changes to fiscal operations in recent years, when combined with the ongoing economic and revenue recovery, have enabled the state to materially improve its financial position, enhancing its ability to address future fiscal challenges. Progress includes timely, more structurally sound budgets, spending restraint, continued sizable reductions in budgetary debt, and initial funding of reserves. Fitch upgraded the state's GO rating to 'A+' from 'A', on Feb. 25, 2015.

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 pledge 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 'A' rating is one notch below the GO rating of the state of California, currently 'A+', Outlook Stable. 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 approximately $1.95 billion of outstanding series 2005A enhanced tobacco bonds outstanding.

SECURITY PROVISIONS

The pledge to bondholders under the enhanced indenture includes tobacco settlement receipts, reserves that are expected to be funded at $150 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. Since 2004, the governor has requested, and the state's annual budgets have included, a nominal appropriation of $1,000 with the authority to augment funding without legislative approval.

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. The fund was subsequently replenished. Concurrent with this issuance, the state is seeking consent on amendments to restructure the reserves, including the supplemental reserve.

For further information on the State of California's GO bond rating, please refer to Fitch's rating action commentary dated Feb. 25, 2015, available on Fitch's web site at 'www.fitchratings.com'.

Additional information is available at 'www.fitchratings.com'.

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

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=981069

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Contacts

Fitch Ratings
Primary Analyst
Karen Krop
Senior Director
+1-212-908-0661
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Douglas Offerman
Senior Director
+1-212-908-0889
or
Committee Chairperson
Laura Porter
Managing Director
+1-212-908-0575
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Karen Krop
Senior Director
+1-212-908-0661
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Douglas Offerman
Senior Director
+1-212-908-0889
or
Committee Chairperson
Laura Porter
Managing Director
+1-212-908-0575
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com