TSASC Inc. (Series 2017A And 2017B) Assigned Ratings

Stocks and Financial Services Press Releases Friday January 20, 2017 09:14
NEW YORK--20 Jan--S&P Global Ratings
NEW YORK (S&P Global Ratings) Jan. 19, 2017--S&P Global Ratings today assigned ratings to TSASC Inc.'s $828.07 million tobacco settlement asset-backed bonds series 2017A and 2017B (see list).
The bond issuance is backed by tobacco settlement revenues resulting from the master settlement agreement payments, fully funded liquidity reserve accounts, and interest income.
The ratings reflect our view of:
The likelihood that timely interest and scheduled principal payments (including mandatory sinking fund installments on certain 2017A bonds) will be made at each bond's maturity.

The credit quality of the two largest participating tobacco manufacturers: Altria Group Inc., parent of Philip Morris USA Inc. (Philip Morris), and Reynolds American Inc., parent of R.J. Reynolds Tobacco Co. (RJ Reynolds).

On Jan. 17, 2017, British American Tobacco PLC (BAT; 'A-') announced that it reached an agreement to purchase the 57.8% of RJ Reynolds that it did not already own. BAT has a very limited presence in the U.S. (outside of its existing large share of RJ Reynolds); therefore, this purchase will not result in an increase in its U.S. market share.

BAT is currently on CreditWatch with negative implications (see "Research Update: U.K.-Based British American Tobacco On CreditWatch Negative Following Merger Proposal," published Oct. 26, 2016); however, even with the possibility of a one-notch downgrade, it would remain investment grade (i.e., rated 'BBB-' or higher). The transaction's legal and payment structures.

The senior liquidity reserve account of $48 million and the subordinate liquidity reserve account of $40.3 million, both fully funded at closing and only available to series 2017A and 2017B, respectively.

The ratings we assigned to the series 2017A bonds maturing on or before June 2026 are one notch higher than the ones we assigned to the bonds maturing after June 2026, and two notches higher than the rating on the bonds maturing after June 2036.

This is because we believe there are qualitative differences between the different maturities. The results of our cash flow stresses for the bonds maturing after June 2026 are strong and can quantitatively support a higher rating level; however, a longer time horizon to legal maturity (more than 10 and 20 years, respectively) increases the uncertainty of our projections and the potential for event risk in the tobacco industry and in tobacco securitizations.

We believe that the ratings on the bonds with longer maturity profiles should be more closely tied to the tobacco industry's business risk profile and the current ratings on the two largest tobacco manufacturers.


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