Fitch Ratings launched a new cash flow model for reviewing its portfolio of tobacco settlement ABS transactions, according to a release from the agency.

Fitch expects most of the ratings to be affirmed, though a few downgrades and upgrades are anticipated in the range of one to three notches.

The agency also said rating changes can be connected to cash flow performance outside of its expectation, aside from revised modeling assumptions and/or capabilities.

Fitch will also assign Rating Outlooks to the bonds.

For each class of bonds, the new model indicates the level of the annual Master Settlement Agreement (MSA) payment percent change the trust would be able to sustain and still pay the bond in full by the legal final date.

The tobacco consumption level and inflation rate as well as state specific adjustments, as specified in the MSA, affect the amount of annual MSA payments, according to Fitch.

The base case ‘B’ corresponds to a 1% increase in the MSA payment received by the trust every year. The ‘BBB’ category corresponds to an annual MSA payment decline of up to 1.25%.

The new model accounts for the amount of the latest MSA payment that the transaction has received, the capital structure, the reserve account, and the bond’s legal final dates.

The bond payments are also tied to the tobacco companies making MSA payments. Tobacco settlement bonds can be rated up to ‘BBB+’ based on the rating agency’s view of the whole tobacco industry and the MSA’s executory nature.

In the event of a bankruptcy of tobacco companies, Fitch said it believes there is an incentive for these firms to continue to make payments under the MSA.

Subscribe Now

Access to a full range of industry content, analysis and expert commentary.

30-Day Free Trial

No credit card required. Access coverage of the securitization marketplace, including breaking news updated throughout the day.