NEW YORK--(BUSINESS WIRE)--Fitch Ratings has published U.S. tobacco settlement ABS rankings based on the breakeven model outputs and ratings of Fitch-rated bonds. Fitch completed a review of tobacco portfolio accounting for the amount of Master Settlement Agreement (MSA) payments received in 2014 and published the rating changes on Aug. 8, 2014.
The output produced by Fitch's tobacco settlement ABS breakeven model (the Model) for a bond is a key rating driver. The model indicates, for each class of bonds, the level of the annual MSA payment percent change the trust would be able to sustain and still pay timely interest and principal in full by maturity. The amount of the latest MSA payment received by the trust, the capital structure, the reserve account balance, and the bond's maturity date are all key inputs to the model. A positive breakeven output indicates the minimum percentage of year-to-year growth in the MSA payments that are necessary for the bond to pay in full and on time. A negative output represents the maximum annual rate of decline in the MSA payments that the bond can withstand before defaulting.
The model indicated grade shows what the rating on the bond would be without any qualitative adjustments or the impact of the rating cap Fitch employs in this sector. Tobacco settlement ABS ratings are capped at 'BBB+sf', or one notch above Fitch's assessment of the tobacco industry and accounts for the risk of manufacturer default under the MSA. Therefore, all bonds with a model indicated grade of 'a-' or above will have ratings at 'BBB+sf'. At this time, 84 bonds have model indicated grades that are indicative of ratings above 'BBB+sf'. All bonds with a model indicated grade of 'bbb+' or lower were assigned Negative Outlooks as a result of Fitch's belief that the ratings will remain under pressure for downgrades.
Model indicated grades and the actual ratings do not exactly match. This is because qualitative adjustments are made to avoid unnecessary rating volatility by requiring two consecutive years of model outputs to change ratings to what is indicated by the model. However, if the model indicated grade differs from the current rating by more than one notch, in most cases, the rating is changed immediately to a level that is a notch above the model indicated grade. Therefore, the qualitative adjustment generally would not result in the actual rating being different from the model indicated grade by more than a notch.
For a full list of breakeven multiples please see 'Fitch Publishes U.S. Tobacco ABS Breakeven Rankings for 2014', which is available at 'www.fitchratings.com'.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'U.S. Tobacco Settlement ABS Criteria' (July 2014);
--'Global Structured Finance Rating Criteria '(August 2014).
Applicable Criteria and Related Research: Fitch Publishes U.S. Tobacco ABS Breakeven Rankings for 2014
U.S. Tobacco Settlement ABS Criteria
Global Structured Finance Rating Criteria