Lehman Brothers priced its first transaction backed by tobacco litigation fees stemming from the Master Settlement Agreement last month. Until now, this sector had been the exclusive province of Deutsche Bank Securities.

The 8.3-year class A notes, rated Baa2' by Moody's Investors Service, priced in a negotiated placement to yield 9.25%, right in line with initial price guidance for the 8.3-year tenor paper. The legal final maturity is 2034. Global Securitization Services LLC is administrating the transaction.

While the last such transaction had a more auspicious start - Deutsche's $70.5 million 2002-5 offering went off with an A3' Moody's rating - the deal has since experienced multiple downgrades and is currently at Baa1' by Moody's. The most recent downgrade was in June 2003.

The Lehman deal encompasses the expected cashflows under the Texas Fee Payment agreement due law firms Provost Umphrey Law Firm, L.L.P, Williams Bailey, L.L.P., and NPR Holdings, LTD. Both Provost Umphrey and Williams Bailey were parties in previous transactions structured by Deutsche Bank.

Overcollateralization serves as the primary form of credit support on the deal. Moody's believes the primary risks to be dilution and the possible bankruptcy of the tobacco companies. Only one of the payment obligor tobacco companies - United States Tobacco Co. at A3' - currently has a high investment-grade unsecured credit rating. Collectively with U.S. Tobacco, Brown & Williamson (Baa1), Lorilard Tobacco (Baa1), Phillip Morris (Baa2) and RJR Reynolds (Ba2) all contribute to the quarterly $125 million MSA payments, based on each firm's market share.

"The bankruptcy of one or more of the tobacco companies could result in the disruption of cashflows to this transaction due to an automatic stay under either a Chapter 7 or a Chapter 11 bankruptcy filing." Moody's said in a pre-sale report on the deal. "In such case, all payment obligations of the bankrupt company would be suspended temporarily."

Tobacco-related ABS has had a rough history, suffering downgrades on 27 classes in the month of March alone. Headline risk, the decline in smoking and the reported financial straits of many major tobacco companies have all contributed to the bonds' tarnished image.

Copyright 2004 Thomson Media Inc. All Rights Reserved.

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