S&P affirms 166 tobacco bond ratings on CreditWatch, cuts 67, raises 23

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S&P Global Ratings said it made 166 affirmations, 67 downgrades and 23 upgrades on 256 classes of outstanding tobacco settlement revenue bonds that had been on negative CreditWatch.

All of the ABS transactions are backed by tobacco settlement revenues resulting from master settlement agreement payments. S&P said the January and May CreditWatch placements reflected both the downgrade of Altria on Dec. 20, 2018 and the lower-than-expected settlement payments based on lower cigarette consumption.

“While we believe the rapid growth of electronic cigarettes has contributed to the acceleration in volume declines of combustible cigarettes, other factors such as heightened health awareness and state/local regulatory enactments raising the minimum age to purchase tobacco products to 21 are likely having an impact also,” S&P said in a release. “While further legislation aimed at vaping products could moderate the rate of volume declines for combustibles, we are uncertain if there will be a reversion back to the 3.00%-4.00% historical range, so we ran an updated volume decline scenario as an additional stress along with our current volume decline assumptions from the criteria.”
S&P said the overall view of the declining market also prompted it to be more conservative in its assignment of ratings at the lower rating levels.

“Current interest bonds that previously could have achieved a rating of 'B- (sf)' have to also pass a steady state test, defined as 0% consumption decline with 'B- (sf)' recovery assumptions. If it cannot, a 'CCC+ (sf)' rating is assigned. To differentiate the capital appreciation bonds that do not pass any rating tests defined in the criteria, the CABs were downgraded to 'CCC- (sf)'. Previously the CABs were rated 'CCC+ (sf)' and 'CCC (sf)' depending on the structure of the deal,” S&P said.

The results of a cash flow analysis were mixed, S&P said, adding it anticipated downgrades because the new stressed cigarette shipment assumption is 1.00% greater than the high decline assumption contained in its criteria.

"Also, we expected downgrades on the bonds that do not pass the largest product manufacturer test because they now have a ceiling of 'BBB' (previously 'BBB+' ceiling before Altria was downgraded). Also, attributing to some of the downgrades was the additional steady state stress for current pay bonds and the assignment of the 'CCC-' to all capital appreciation bonds that do not pass any of the stresses in the criteria.”

S&P said the upgrades reflect that many of the bonds have paid down further than anticipated since they were last analyzed, mainly due to non-participating manufacturer settlements, and that the remaining length of time until maturity has moved bonds into other maturity buckets for notching.

“We will continue to monitor the tobacco sector and the tobacco settlement bonds and assess any potential impact on our outstanding ratings,” S&P said.

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