A March 13 settlement between 17 U.S. states, the District of Columbia, and Puerto Rico and several tobacco manufacturers should have a positive impact on cash flows for certain bonds backed by settlement payments, Fitch Rating said Friday.
The "stipulated partial settlement award", initially proposed between these parties in December 2012, relates to the non-participating manufacturer (NPM) adjustment provisions contained in the master settlement agreement (MSA) for 2003-2012.
Under the agreement, $4 billion in disputed payments currently escrowed will be released to the participating states and territories, while original participating manufacturers will receive credits against those states' future MSA payments.
NPM adjustments that are still being disputed will remain in place for those states that are not party to the agreement.
Fitch said the settlement is “net cash positive” to those states participating and, by extension, their related securitizations. It noted, however, that the ratings impact will be limited, since there is a cap applied to tobacco settlement ABS.
The resulting one-time cash payment to tobacco bonds should benefit turbo bonds that have fallen behind their original maturity schedules.
“As this settlement ends the uncertainty
surrounding this complex legal issue, we anticipate renewed interest in tobacco settlement securitization, by states that have not yet securitized as well as those that have already securitized and seek to refinance their existing debt at lower interest rates,” Fitch said.
In addition to the District of Columbia and Puerto Rico, the 17 states in the settlement include: Alabama, Arizona, Arkansas, California, Georgia, Kansas, Louisiana, Michigan, Nebraska, Nevada, New Hampshire, New Jersey, North Carolina, Tennessee, Virginia, West Virginia, and Wyoming.