Standard & Poor's Ratings Services today placed its ratings on certain maturities of Tobacco Settlement Financing Corp.'s asset-backed bonds series 2015A on CreditWatch with negative implications. This follows our press release on June 11, 2015, where we stated that we will continue to monitor the transaction's progress with an action plan intended to address an issue that could affect the ratings on some of the series 2015A bonds (see "S&P Continues To Monitor Certain Maturities Of Tobacco Settlement Financing Corp. Asset-Backed Bonds Series 2015A"). Despite the fact that approximately 93% of the eligible voting bondholders have, to date, voted in favor of the amendment proposed to remedy the issue, in our view, the passage of time increases the likelihood that the amendment process may not conclude successfully.
The transaction is an asset-backed securities (ABS) deal backed by the corporation's right, title, and interest in certain amounts due to the state of Rhode Island under the master settlement agreement entered into in 1998 by 46 states and participating tobacco manufacturers. Standard & Poor's assigned final ratings to the transaction on March 19, 2015 (see "Tobacco Settlement Financing Corp.’s $332.3 Million Asset-Backed Bonds Series 2015 Assigned Ratings," published March 19, 2015).
In rating the bonds, our analysis did not consider certain provisions of the transaction documents which provide that an event of default triggered by the subordinate series 2015B bonds (not rated by Standard & Poor's) would affect the payment priority among the senior series 2015A bonds rated by Standard & Poor's, which would then be paid pro rata ahead of the series 2015B bonds. Had we taken this into account, certain maturities of the series 2015A bonds maturing on or after June 1, 2019, would not have been able to withstand our cash flow stress test referred to as the "Participating Manufacturer Bankruptcy Test" in our "Revised Framework for Applying U.S. Tobacco Securitization Criteria," published May 18, 2007. As a result, the ratings on any affected bonds would have been lower. In addition, bonds with longer maturities than the affected bonds would have likely received lower ratings as well given qualitative considerations.
Certain transaction participants have proposed an action plan to address the aforementioned issue, including a proposal to amend the existing transaction documents. The initial voting period and one extension period for the amendment have now elapsed, with approximately 93% of bondholders submitting positive votes. All of the eligible voting bondholders need to submit positive votes for the amendment to be approved. While the action plan is still ongoing, in our view, the passage of time increases the likelihood that the amendment process may not conclude successfully. Therefore, we placed our ratings on all bonds maturing on or after June 1, 2019, on CreditWatch with negative implications. Absent the successful conclusion of the amendment process or other mitigating factors, we intend to review for downgrade the ratings placed on CreditWatch negative within the next month.
