The tobacco bond market took a series of hits last week, marked by a multi-notch industry downgrade from Fitch Ratings, which, on the corporate side, took R.J. Reynolds below investment grade. On the ABS front, Fitch further downgraded the entire sector, affecting approximately $18 billion in bonds.

Currently, Fitch's settlement-backed bonds - with top classes general at BBB' - enjoy a one-notch separation from the agency's industry rating, which is now at BBB-'. While these are closely aligned, as the payments to the master settlement are essentially payments by the industry to the states, Fitch believes that the participating tobacco companies are slightly more likely to honor their master settlement payments in bankruptcy than their unsecured debt, mostly because the contract to pay is executory, which means that if the tobacco company continues making payments, the States will not sue them again.

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