Fitch to Rate California County Tobacco Securitization Agency's Sub Series 2006.
The ratings are based on the structure of the bonds issued and the credit quality of the collateral securing the bonds, which consists of annual payments and strategic contribution payments by the three largest domestic tobacco manufacturers: Philip Morris Inc., R.J. Reynolds Tobacco Co., and Lorillard Tobacco Co. (the original participating manufacturers (OPMs)), under a master settlement agreement (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 expected rating of the tobacco settlement senior bonds to 'BBB'.
Accordingly, the expected 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. For a more detailed discussion of the industry, see the Fitch report 'U.S. Tobacco Industry Report - On the Verge of Industry Altering Decisions' dated Oct. 10, 2005, available on the Fitch Ratings web site at www.fitchratings.com.
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 each bond's accreted value on their respective maturity dates. Therefore, the expected rating is also based on the transaction's ability to withstand cash flow stresses commensurate with a 'BBB-' rating for the subordinate series 2006A bonds and a 'BB' rating for the subordinate series 2006B bonds. Finally, the expected ratings reflect the transaction's sound legal and financial structures.