Correction: Fitch Rts $2.32B Golden State Tobacco Securitization Corp, CA 'A-'; Rtg Watch Neg.

Business Editors

NEW YORK--(BUSINESS WIRE)--Sept. 19, 2003

(On the 9/17 release the CIEDB was incorrectly referenced in the sixth paragraph. The Corporation was the correct entity as the previous purchaser of 56.57% of the state's tobacco settlement revenues and previously issued $3 billion of tobacco settlement bonds.)

Fitch Ratings-New York-September 17, 2003: Fitch Ratings assigns the Golden State Tobacco Securitization Corporation's $2.32 billion enhanced tobacco settlement asset-backed bonds, series 2003B 'A-'. The rating is on Rating Watch Negative, reflecting the state's general obligation bond rating supporting the appropriation backstop. The issuance consists of:

-- $129.4 million serial bonds due June 1, 2008-17;

-- $227.8 million term bonds due June 1, 2023;

-- $263.8 million term bonds due June 1, 2028;

-- $376.3 million term bonds due June 1, 2033;

-- $547.9 million term bonds due June 1, 2038;

-- $773.4 million term bonds due June 1, 2043.

The bonds are optionally callable at par on dates to be determined. The bonds will be offered the week of Sept. 22 through a syndicate managed by Citigroup.

While pledged tobacco settlement revenues are the expected source of payment, ultimate security and the assigned rating is based on the covenant that the director of finance will request the governor to include in the annual state budget act an appropriation for the full amount of debt service, and operating expenses, due on the bonds in the next fiscal year. Consequently, the rating on these bonds reflects the state's credit.

California's general obligation bonds are rated 'A', and remain on Rating Watch Negative to reflect the potential for further financial disruption and its enlarged dependence on the financial markets. The state's debt burden remains in the moderate range at 4.2% of personal income including the revenue anticipation warrants. California's economy is broad and wealthy although quite subdued, contributing to the financial pressures it has been under since 2001. This year's budget is balanced, achieved through substantial use of non-recurring revenues. However, this issue, together with a revenue anticipation note issue, a deficit financing bond issue, and a planned pension obligation issue create a heavy reliance on continued access to the capital markets to finance the considerable accumulated shortfall. As the state has not yet fully absorbed its very real revenue losses from the unprecedented drop in personal income tax receipts (some 25% in fiscal 2002), a budget gap of $8 billion remains to be dealt with in fiscal 2005.

The corporation is a special purpose trust established as a not-for-profit corporation. Pursuant to the purchase and sale agreement, the state through the California Infrastructure and Economic Development Bank (CIEDB) acting by, on behalf, and as agent for the state, will sell to the corporation the pledged settlement payments consisting of 43.43% of its share of tobacco settlement revenues received under the master settlement agreement (MSA). Under the indenture the corporation assigns and pledges the sold settlement payments to the trustee.

A debt service reserve account equal to maximum annual debt service on these bonds will be funded with bond proceeds, providing timing protection. The Corporation previously purchased 56.57% of the state's tobacco settlement revenues and issued $3.0 billion of tobacco settlement bonds under a separately secured indenture with no appropriation provision. While the two issues are separately secured, the trustee's rights to the tobacco settlement payments are equal and on parity with the 56.57% of the payments pledged to the series 2003A bonds.

In the act, the state has covenanted that the governor will annually request legislative appropriations for the full debt service due on these bonds in the following fiscal year. However, the attorney general has expressed no opinion that this provision is valid or binding and enforceable given the governor's constitutional powers. Under the bond documents, the state covenants that the director of finance shall request the governor to include an appropriation for the succeeding year's debt service and operating expenses, and that the governor in each year will request such an appropriation from the legislature. The attorney general has opined that the bond documents are legal, valid and binding agreements, and enforceable.

The corporation will certify the amount of debt service and operating expenses due in the next fiscal year to the state's director of finance no later than Nov. 1, in time for budget formulation. The state covenants that the director of finance will request the governor to request the appropriation as a line item in the annual budget act. No later than May 5 the corporation will certify any deficiency between the tobacco settlement revenues received by April 30 and the debt service and operating expenses due in the next twelve months. If needed, state appropriations will be disbursed to the trustee no later than 5 days before the next debt service payment date. Debt service is due June 1 and Dec. 1, and the state's fiscal year commences July 1.

Projected debt service coverage from the 43.43% of tobacco settlement revenues exceeds the debt service on these bonds, providing excess revenues which will be retained in a supplemental account and may only be used for debt service or debt retirement. Therefore, while the bonds are scheduled for a long forty-year maturity, they are expected to be fully retired at a much earlier date. This structure provides additional strength, in the event that payments received by the corporation are less than those projected in the Global Insight Inc. consumption forecast.

In addition to the cash flow considerations, Fitch rates tobacco-related securitizations based on its tobacco industry assessment, currently 'BBB-'. However, all bonds remain on Rating Watch Negative, based on Fitch's current outlook for the tobacco industry. Most stand-alone tobacco transactions receive a rating one notch above the industry rating, based on Fitch's opinion that due to the executory contract nature of the MSA, payments under the agreement are more likely to be made in a bankruptcy scenario than payments on the unsecured debt of participating tobacco manufacturers.