Notwithstanding the recent $145 billion punitive damage award against the tobacco industry in the Engle class-action suit, Standard & Poor's Ratings Services recently affirmed its ratings on all tobacco securitization bonds.

In a press release, the rating agency stated that company-specific ratings were not directly linked to the specific ratings on the bonds. However, since industry volume - which is determined by the number of domestic cigarette shipments - forms the basis for Master Settlement Agreement (MSA) payments, a linkage is formed between the ratings on the bonds and the overall performance of the industry.

Thus if rating actions on the tobacco companies are taken due to industry risk, this may result in a change on the ratings of the securitization bonds.

Aside from industry volume, the rating agency also looked at the willingness and ability of the tobacco companies to make the MSA payments in a bankruptcy scenario. Part of S&P's analysis was to make a cost-benefit determination.

"Companies would probably choose to continue making payments despite a bankruptcy filing," said Chris Howley, a director at S & P. "Economically it would make sense for them to continue payments rather than risk defaulting under the MSA agreement, since such a default could expose the companies to liabilities that they sought to avoid by signing the MSA agreement."

Moreover, under the U.S. Bankruptcy Code, these payments could be classified as an administrative expense - legally allowing the companies to make MSA payments in cases of bankruptcy.

The bonds are also equipped with "triggers" or "traps" that would allow bond holders to collect the amounts that would normally go to the residual asset holders, in this case the issuers.

"The traps' and triggers' provide us comfort in these transactions," said Bernhard Fischer, a director at S&P. He added that these transactions rely very much on projections on future revenue flows. "If the projections are missed, the traps' and triggers' provide a mechanism by which monies can be trapped to pay down the bonds in a more timely fashion."

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