The Golden State Tobacco Securitization Corp., Series 2021, is preparing to issue about $4.1 billion in asset-backed securities in a deal that is expected to close by mid-December.
Settlement agreement payments from of the tobacco industry’s largest participating manufacturers – Altria Group, Inc., the parent company of Philip Morris, USA, and British American Tobacco – will secure the bond payments to investors, according to S&P Global Ratings. The company intends to assign ‘A’ ratings to most of the notes, based on cash flow expectations.
The Golden State trust will use the proceeds of the series 2021 to refund or nullify all of the outstanding 2007, 2017 and 2018 series. Golden State has pledged 56.5% of its settlement proceeds to the transaction.
The bonds will benefit from a senior liquidity reserve account of $167.5 million and a subordinate liquidity reserve account of $20.5 million, S&P said.
A turbo redemption feature could accelerate amortization of the series B-1 subordinate bonds, an element that S&P believes could more effectively mitigate risks related to projections of declines in cigarette use. Potential shifts in market share to “roll your own” cigarette manufacturers, known as non-participating manufacturers, are also factored into this.
The transaction has a number of vulnerabilities, including the increase in popularity of alternative tobacco products. Sales on those products would not result in payments under the master settlement agreement. Further litigation risk is another weakness, as is a further decline in cigarette shipments as a result of higher excise taxes imposed by federal, state and local governments.
S&P also noted several mitigating industry factors that should maintain cash flow to the bonds. The administration of President Joe Biden have made recent announcements to ban menthol cigarettes, citing the view that they are more addictive than unflavored products. The rating agency noted reports which found that close to 99% of menthol smokers transitioned to non-menthol cigarettes.
“Our securitization rating analysis has always included a sensitivity scenario that applies a 30% one-time decline in consumption,” S&P noted in the report, adding that the drop “is tested at different time periods throughout the life of the transaction for all ‘A’ category bonds.”
