Fitch Rates Northern Tobacco Securitization Corp (Alaska) Series 2006.

NEW YORK -- Fitch assigns ratings to the Northern Tobacco Securitization Corporation's (NTSC) issuance of tobacco settlement asset-backed bonds as follows:

Series 2006A senior current interest bonds

-- $117,510,000 turbo term bonds, due June 1, 2023 'BBB';

-- $70,105,000 turbo term bonds, due June 1, 2032 'BBB';

-- $212,270,000 turbo term bonds, due June 1, 2046 'BBB'.

Series 2006B first subordinate CABs

-- $8,668,052.00 turbo term CABs, due June 1, 2046 'BBB'.

Series 2006C second subordinate CABs

-- $3,434,807.60 turbo term CABs, due June 1, 2046 'BBB-'.

The ratings of the above bonds address the issuer's ability to pay the senior series 2006A bonds by their legal final maturity dates and to pay the accreted value of the subordinate series 2006B and subordinate series 2006C bonds by their respective legal final maturity dates.

The issuer, Northern Tobacco Securitization Corporation (NTSC), is a non-profit corporation organized as a subsidiary of the Alaska Housing Finance Corporation (AHFC). As a subsidiary of AHFC, NTSC is a government instrumentality of, but separate and apart from, the State of Alaska (the state).

The collateral securing the series 2006 bonds consists of the NTSC's rights under a purchase and sale agreement with the state, which is secured by the state's share of the tobacco settlement revenues (TSRs) received under consent decree and Alaska statutes. In connection with this transaction, the 2000 Purchase and Sale Agreement and the 2001 Purchase and Sale Agreement will be amended and consolidated into one agreement (Purchase and Sale Agreement) such that the NTSC tobacco assets are pledged to the series 2006 bonds, and the state's prior residual rights (related reserve funding requirements and operating expenses) are transferred to NTSC in return for a portion of the bond proceeds.

According to the Purchase and Sale Agreement dated Oct. 12, 2000 among the state, AHFC and NTSC, the State sold to AHFC - and NTSC then purchased from AHFC - the right, title and interest in and to 40% of the annual payments and strategic fund payments required to be made beginning July 1, 2001 by the participating manufacturers (PMs) to the state under the Master Settlement Agreement (MSA) with proceeds of NTSC's tobacco settlement asset-backed bonds, series 2000. As additional consideration for such sale, NTSC caused to be delivered to the state the right to receive all revenues derived from the collateral, after the payment of debt service on the series 2000 bonds and related reserve funding requirements and operating expenses.

Pursuant to a Purchase and Sale Agreement dated as of Aug. 1, 2001 between the state and NTSC (2001 Purchase and Sale Agreement), the state sold to NTSC the right, title and interest in and to another 40% of the annual payments and strategic fund payments required to be made beginning Jan. 10, 2002 by the PMs to the state under the MSA with proceeds of NTSC's tobacco settlement asset-backed bonds, series 2001. As additional consideration for such sale, NTSC caused to be delivered to the state the right to receive all revenues derived from the collateral, after the payment of debt service on the series 2001 bonds and related reserve funding requirements and operating expenses.

Under applicable Alaska statutes, the claim of NTSC to the NTSC tobacco assets is on parity with the claim of the state to own the remaining 20% of the annual payments and strategic fund payments required to be made to the state under the MSA.

In the event that NTSC's 80% ownership share of the total amount of TSRs required to be paid by the PMs to the State under the MSA during any period and constituting NTSC tobacco assets shall not be at least equal to the amount of interest on the bonds and principal of the bonds due at the respective maturities thereof, and other amounts specified in the indenture, NTSC is not entitled to claim any share of the amounts pledged to the state's retained ownership of TSRs (i.e., 20%) for the payment of any such amounts and neither NTSC, AHFC nor the State has any obligation, moral or otherwise, to provide such funds to make up such deficiency.

The assigned ratings are based on the bond structure and credit quality of the underlying collateral securing the loan agreement, which consists of annual payments and strategic contribution payments by the three largest domestic tobacco manufacturers: Philip Morris Inc., Reynolds American Inc., and Lorillard Tobacco Co. (the original participating manufacturers (OPMs)), under the MSA entered into with the attorneys general of 46 states, the District of Columbia, the Commonwealth of Puerto Rico, the U.S. Virgin Islands, the Commonwealth of Northern Mariana Islands, American Samoa, and Guam.

Fitch's view of the credit quality of the collateral takes into account two fundamental characteristics of the MSA: since payments under the MSA are based on the relative market share of the domestic tobacco manufacturers, the payment obligation can be considered an industry obligation, which Fitch currently deems to be rated 'BBB-' on an unsecured basis; and the MSA should survive the bankruptcy of a domestic tobacco manufacturer, making it more likely that the manufacturer would continue to make payments under the MSA ahead of its unsecured indebtedness. These are the major characteristics of the MSA that support and, at the same time, limit the rating of the tobacco settlement senior bonds to 'BBB'.

Accordingly, the rating on this transaction is linked to and will move with Fitch's future assessment of the tobacco industry's overall credit quality. The credit quality of the industry, in turn, will be significantly influenced by the underlying ratings of the three major domestic tobacco manufacturers and Fitch's view of the relative strength of those three manufacturers within the overall domestic tobacco industry.

In addition, since payments under the MSA are subject to various adjustments and offsets based on several factors, including cigarette consumption, Fitch developed a series of cash flow stresses to determine the transaction's ability to make timely payments of interest and to pay principal on the bond's maturity dates. Therefore, the rating is also based on the transaction's ability to withstand cash flow stresses commensurate with a 'BBB' rating for the senior series 2006A bonds and for the subordinate series 2006B bonds and a 'BBB-' rating for the subordinate series 2006C bonds. Finally, the ratings reflect the transaction's sound legal and financial structures.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.