Last week's settlement between several tobacco manufacturers and 17 states, the District of Columbia, and Puerto Rico should have a positive impact on cash flows for certain tobacco settlement asset-backed security transactions, according to Fitch Ratings.
Under the "stipulated partial settlement award," $4 billion in disputed payments currently escrowed will be released to the participating states and territories, while original participating manufacturers will receive credits against the future master service agreement payments of those states.
Disputed non-participating manufacturer adjustments will remain in place for those states not included in the agreement.
"The settlement is net cash positive to those states participating and, by extension, their related securitizations," Fitch analysts Steven Stubbs and Rob Rowan wrote in a report on Friday. "Fitch views this development as a credit positive, although the ratings impact will be limited given the cap applied to tobacco settlement ABS."
The agreement relates to the non-participating manufacturer adjustment provisions contained in the master settlement agreement for 2003-2012. The agreement was initially proposed between these parties in December and settled on Wednesday.
Fitch analysts said the payment will benefit turbo bonds that have fallen behind on their original maturity schedules.
"As this settlement ends the uncertainty surrounding this complex legal issue, we anticipate renewed interest in tobacco settlement securitization by states that have not yet securitized as well as those that have already securitized and seek to refinance their existing debt at lower interest rates," the report said.
The 17 states in the settlement are Alabama, Arizona, Arkansas, California, Georgia, Kansas, Louisiana, Michigan, Nebraska, Nevada, New Hampshire, New Jersey, North Carolina, Tennessee, Virginia, West Virginia, and Wyoming.
