S&P Places 11 Tobacco Bond Issues on Negative Watch

Standard & Poor's has placed the ratings for 11 series of tobacco settlement bonds on negative watch, after the rating agency revised its forecast and stress assumptions for the volume of cigarettes shipped.

A negative outlook remains for the other 245 classes of rated tobacco settlement bonds.

Domestic tobacco shipment volume declined by 5% in 2007, according to Management Science Associates Inc. Tobacco bonds are backed by payments made to 46 states by tobacco companies under the 1998 Master Settlement Agreement. Many states took these payments and securitized them to back bond issues.

"We believe the increased restrictions on smokers, along with rising prices, will keep U.S. cigarette shipments falling," Standard & Poor's said in the release.

Subsequently, the ratings changes came because of the agency's view. Due to weaker-than-expected volumes, Standard & Poor's now forecasts a 3.5% shipment decline in 2008 and a 3% decline in 2009. In addition, the agency has updated its stress assumptions for BBB ratings, which now assumes a 4.5% decline in 2008 and a 4.0% decline in 2009.

Since 1997, the year before the MSA was signed, domestic cigarette shipments have declined at an annual compound rate of 3.82%, according to Richard Larkin, director of research at Herbert J. Sims & Co.

"Declines in tobacco consumption and tobacco company challenges to their annual payments under the 1998 Master Settlement could hurt the cash flow needed to repay tobacco bonds," Larkin said in a recent research note.

The bonds moved to negative watch include two series in last year's $5.5 billion Buckeye Tobacco Settlement Financing Authority deal from Ohio; three series in last year's $523 million Michigan Tobacco Settlement Finance Authority deal; two series in New Jersey's $3.6 billion Tobacco Settlement FinancingCorp. deal of 2007; two series in the $194 million deal for Rhode Island's Tobacco Settlement FinancingCorp.; one series from the $255 million Tobacco Securitization Authority of Northern California transaction; and one series in West Virginia's $911 million Tobacco Settlement Finance Authority deal.

It was unclear how the ratings changes affected the market for tobacco bonds. Citi yesterday priced $205 million in tobacco bonds for Puerto Rico, but a pricing wire was not available as of press time. The sale included both turbo bonds and maturities going out through 2058.

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