Fitch Takes Various Actions on California County TSA Series 2002 & 2006 Bonds (Stanislaus County)

NEW YORK--(BUSINESS WIRE)--Fitch Ratings affirms four and downgrades one class of tobacco settlement asset-backed bonds from California County Tobacco Securitization Agency (Stanislaus County Tobacco Asset Securitization Authority) series 2002 and 2006, as follows:

--$24,490,000 current interest turbo term bonds due June 1, 2033 affirmed at 'BBB+'; Outlook Stable;

--$34,725,000 current interest turbo term bonds due June 1, 2043 affirmed at 'BBB+'; Outlook Stable;

--2006A capital appreciation bonds affirmed at 'BBB'; Outlook Negative;

--2006B capital appreciation bonds affirmed at 'BBB-'; Outlook Negative;

--2006C capital appreciation bonds downgraded to 'BB'; Outlook Negative.

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 ratings of the turbo bonds suggested by the model are 'A-', the bonds are being affirmed at the cap rating of 'BBB+' with Outlook Stable. In the case of 2006A and 2006B bonds, the ratings are affirmed at 'BBB' and 'BBB-', respectively. 2006C is being downgraded from 'BB+' to 'BB'. In all three cases, the model output suggests that the bonds are under pressure, with breakeven levels indicative of lower ratings. Therefore, the bonds are being assigned a Negative Outlook because of the possibility of the bond being downgraded depending on the amount of future MSA payments received.

California County Tobacco Securitization Agency (Stanislaus County Tobacco Asset Securitization Authority) bonds are secured by the pledged payments made under the MSA. The pledged payments consist of California'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

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.