Moody's Investors Service has put the ratings of approximately $20 billion of tobacco settlement revenue bonds under review, saying an agreement over disputed payments could reduce cash flow to the securitizations.

Moody’s is also correcting certain errors in the cash flow models it used in rating the bonds, which could have a positive impact on the ratings of some bonds and a negative impact on the ratings of others.

The transactions are securitizations of payments that major tobacco manufacturers owe to 46 states and certain territories pursuant to the 1998 Master Settlement Agreement. Moody's already rates most of the bonds below investment grade.

Tobacco companies had disputed some of the payments because their market share has dwindled over the past nine years. Last month, Lorillard Tobacco Co., Philip Morris USA, and R.J. Reynolds Tobacco Co. said they had reached an agreement with 17 states and two territories. The new agreement remains subject to approval by an arbitration panel.

In a report published Tuesday, Moody’s said that, if approved, several provisions of the agreement will reduce cash flow to most term bonds in the securitizations sponsored by states joining the agreement.

Moody’s said the participating states will receive only 54% of the approximately $4 billion share under dispute, “significantly less than the 100% that we expected.”

In addition, “by setting forth a new formula for addressing future payment disputes, the agreement suggests that similar payment disputes and concomitant settlements at less than 100% could continue for a long period of time, potentially for the entire term of the bonds,” the ratings agency said.

These two provisions of the agreement also indirectly impact the securitizations sponsored by the non-joining states, because they set a precedent that their recoveries of future disputed amounts can be less than 100% and that the payment disputes will continue for a long period of time, both credit negatives. 

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