Fitch Takes Various Actions on Michigan Tobacco Settlement Financing Authority, Series 2008

NEW YORK--(BUSINESS WIRE)--Fitch Ratings affirms two and downgrades one class from Michigan Tobacco Settlement Financing Authority, tobacco settlement asset-backed bonds, series 2008, as follows:

--$114,860,000 series 2008A turbo current interest bonds due June 1, 2042 affirmed at 'BBB+'; Outlook Stable;

--$29,874,650 series 2008B taxable capital appreciation turbo term bonds due June 1, 2046 affirmed at 'BBB'; Outlook Negative;

--$57,673,814 series 2008C capital appreciation turbo term bonds due June 1, 2058 downgraded to 'BB' from 'BBB-'; 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 up to 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.

The 2008A bond is affirmed at 'BBB+' as supported by the model output with a Stable Rating Outlook. The 2008B bond is affirmed at 'BBB', and the 2008C bond is downgraded to 'BB'. Both bonds are placed on Outlook Negative as the breakeven levels are indicative of lower ratings and the bonds may be downgraded depending on the amount of the future MSA payments received by the trust.

Michigan Tobacco Settlement Financing Authority, tobacco settlement asset-backed bonds, series 2008 bonds are secured by the pledged payments made under the MSA. The pledged payments consist of Michigan'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.