Standard & Poor's put $330 million of tobacco bonds under review for a possible downgrade Wednesday, saying its ratings failed to account for a key risk.

The bonds are backed by payments made to Rhode Island under a settlement agreement with cigarette manufacturers. Proceeds were used to retire a portion of previously issued tobacco bonds.

The Tobacco Settlement Financing Corp. Asset Backed Bonds Series 2015A were issued in March; S&P now rates them as high as A. But its analysis did not take into account what happens if another bond offering, the Series 2015B were to default. The Series 2015B bonds were issued at the same time as the Series 2015A bonds but are not rated by S&P.

Right now, Series 2015B bondholders do not receive any interest or principal unless the Series 2015A bondholders are paid first; should the 2015B bond default, however, this payment priority would be affected.

Some of the participants in the transaction have proposed an amendment to the transaction documents that would remedy the issue; however this would require the approval of 100% of bondholders. The initial voting period and one extension period for the amendment have now elapsed, with approximately 93% of bondholders submitting positive votes.

“Despite the fact that approximately 93% of the eligible voting bondholders have, to date, voted in favor of the amendment proposed to remedy the issue, in our view, the passage of time increases the likelihood that the amendment process may not conclude successfully,” S&P stated.

The review affects all Series 2015A bonds maturing on or after June 1, 2019.

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