Here's a post-crisis first: a tobacco settlement securitization that is backed by fees paid to law firms, rather than states that were parties to the 1998 Master Settlement Agreement with Big Tobacco.
Moody's Investors Service assigned a provisional rating of A2’ to the class A notes to be issued by Tobacco Settlement Fee Finance 2013-1. They have a weighted average life of 5.77 years, and were priced today at par to yield 4%, according to a person familiar with the transaction.
Barclays Capital is lead underwriter
The notes are secured by participation interests in a static pool of future fee award payment streams from four tobacco companies: Philip Morris USA, R.J. Reynolds Tobacco Co., Lorillard Tobacco Co. and U.S. Smokeless Tobacco Co. The fee awards that serve as collateral exist as the result of multiple law firms’ service as outside counsel to the states in the Master Settlement Agreement and to Florida and Mississippi in a separate settlement agreement, according to Moody’s.
Moody's presale report does not identify these law firms; it lists Galway III as the deal’s sponsor.
Under the fee pay agreements, the law firms elect one of two options for payment on a state-by-state basis. Under the first option, the law firms negotiate with the tobacco companies for a “liquidated” fee award capped at a total of $1.25 billion nationwide, and under the second option, the law firms go through an arbitration process to determine the amount of the fee awards. This happens once a quarter and the aggregate quarterly payments are capped at $125 million.
Apparently at least some of the participating law firms chose option No. 2.
The tobacco companies to continue making quarterly payments until the fee awards are repaid in full, according to Moody's.
The aggregate original balance of the fee awards was $14.3 billion. At the end of third-quarter 2013, the tobacco companies had repaid all but $5.5 billion.
According to a person familiar with the transaction, this is the first such deal since 2005. There has been approximately $900 million of issuance in this asset class since 2001.