As the tobacco industry braces for possible new regulatory supervision and legislation, the risk factors to the credit quality of the companies in the industry remain high in the medium term, according to a report by Moody's Investors Service. Outstanding tobacco settlement securitizations, however, still remain stable.
"The driving force of all the securitizations is the volume of tobacco consumption," said Nicolas Weill, vice president and senior credit officer at Moody's. "So while we do make a number of assumptions about how the volume is going to decrease given price increase, tax increases, regulation, we also make assumptions that the tobacco manufacturers could have their own rating impacted by future litigation."
According to the report, written by Christophe Razaire, vice president and senior analyst, Moody's recently confirmed the ratings of nine tobacco companies in the U.S., including four tobacco companies. The outlook for the industry remains stable, but future legal or regulatory developments could change that outlook.
While current litigation against the industry is unlikely to lead to bankruptcies because the pending cases have some weaknesses, if one company does file for bankruptcy, the outstanding bonds should not be impacted.
"If one of [the tobacco manufacturers] would go under, according to the provisions of the master server agreement, the MSA, the other guys would pick up its market share," Weill said. "In order for the deal to be in trouble, you would need all the tobacco manufacturers to file for bankruptcy."
The transactions also have provisions in place in case a tobacco manufacturer should have its corporate rating drop below investment grade. "If one of the tobacco manufacturers drop below investment grade, any cash that would otherwise go out to the certificate holders, to the sellers, is used to pay down the bonds," Weill said. "If the ratings of the tobacco manufacturers were to go down dramatically, we would definitely reassess the transactions."