More than $5 billion in tobacco settlement ABS came to the market last year compared with no issuance in 2004. The resurgence of issuance is being fueled by a string of positive litigation rulings and low interest rates, among other factors.
Fitch Ratings is anticipating a stable outlook for the sector, with a potential for further issuance growth in 2006 as last year's positive conditions continue to affect investor demand for the bonds. Tobacco settlement bonds are issued by cities, counties, states and territories and are backed by future revenues from the 1998 master settlement agreement with Philip Morris USA Inc., R.J. Reynolds Tobacco Co., Brown & Williamson Tobacco Corp. and Lorillard Tobacco Co. Since the agreement, nearly $32 billion in tobacco settlement bond issuance has come to the U.S. market.
Legal developments in 2005 helped to relieve some of the uncertainty surrounding the sector, according to Lena Katsnelson, a director at Fitch.
So far, none of the tobacco companies' corporate credit ratings have received an upgrade as a result of the litigation, but "further favorable resolutions could result in positive rating changes," she said.
The maturing sector is starting to take on additional characteristics of more established sectors of the structured finance market, such as the auto and housing sectors. Last year, $550 million in issuance came in the form of subordinate tobacco settlement bond issuance, offering investors a higher yield option.
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