Cigarette sales reached an historic 55-year low in the U.S., according to a survey by the National Association of Attorneys General (NAAG) that came out earlier this month. Cigarette companies are also complaining about other pressures that threaten their businesses. However, the negative headlines should not be a near-term problem for tobacco securitizations that have continued to come to market this year after a yearlong absence, according to Fitch Ratings.

Last week, Stanislaus and Nassau counties in California announced plans to issue more bonds backed by their shares of future revenues from the 1998 Master Settlement Agreement (MSA) with the four largest tobacco companies in the U.S. The California County Tobacco Securitization Agency is planning to issue a relatively tiny amount, $34 million, while the Nassau County Tobacco Settlement Corp. is planning to push $437.7 million in tobacco-backed bonds onto the market. Fitch Ratings assigned triple-B to double-B ratings to both deals, according to presale reports.

The couple of deals might seem ill timed for two reasons. The NAAG reported that 378 billion cigarettes were sold in the U.S. in 2005, the lowest number since 1951. Even more impressive, according to the group, is that cigarette sales have fallen by more than 21% since the group negotiated the MSA in 1998, which imposed health restrictions on how cigarettes could be marketed, promoted and advertised. Secondly, the tobacco industry continues to face pressure from anti-smoking groups and ongoing smoking and health lawsuits, including private class action litigation and health care cost recovery actions.

Vector Group, a relatively small tobacco company based in Miami, wrote in its 2005 annual report that its Liggett Group subsidiary was named as a defendant in 268 individual lawsuits, 11 self-styled class action suits, and eight attempts by governmental and other third-party health care coverage agencies to recover monetary settlements.

Despite these industry challenges, the companies that are required to pay into the MSA continue to dominate the cigarette business, according to Fitch. In 2005, the Original Participating Manufacturers (OPMs), which include Philip Morris USA, R.J. Reynolds Tobacco, Brown & Williamson Tobacco and Lorillard Tobacco, accounted for 86.1% of overall domestic tobacco shipments, according to a Fitch presale report on the Stanislaus County issuance. Although the Vector Group was not one of the original tobacco companies that are paying into the MSA, it did begin contributing after its market share exceeded a base amount of 0.28% of total cigarettes sold in the U.S.

(c) 2006 Asset Securitization Report and SourceMedia, Inc. All Rights Reserved.

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