Ratings Assigned To Seven Inland Empire Tobacco Securitization Authority Series 2007 Bonds

  • Inland Empire Tobacco Securitization Authority's series 2007 bond issuance is an ABS transaction backed by a portion of Riverside County's (California) tobacco settlement revenues from MSA payments, the transaction's debt service reserve account, and interest income.
  • We assigned ratings to seven classes of bonds from the transaction.
  • The ratings reflect our view of the transaction's legal and payment structures and the credit quality of the participating tobacco manufacturers, among other factors.
NEW YORK (S&P Global Ratings) May 10, 2019--S&P Global Ratings today assigned 
ratings to seven classes of asset-backed bonds from Inland Empire Tobacco 
Securitization Authority's series 2007 issuance (see list). 

The bond issuance is an asset-backed securities (ABS) transaction backed by a 
portion of Riverside County's (California) tobacco settlement revenues from 
master settlement agreement (MSA) payments, the transaction's debt service 
reserve account, and interest income. Tobacco settlement bonds are supported 
only by the pledged payments from MSA and are not linked to the rating on the 
municipality.

The bonds have maturities between 2021 and 2057, and the class C-1 through E 
bonds are capital appreciation bonds. The outstanding bonds in the series were 
originally issued in 2007 and are not being offered at this time. They were 
not rated by S&P Global Ratings. 

The ratings reflect: 
  • The likelihood that timely interest and scheduled principal payments will be made at each bond's maturity;
  • The credit quality of the participating tobacco manufacturers; and
  • The transaction's legal and payment structures.
The ratings also reflect our view of the transaction's performance under a 
series of stressed cash flow scenarios, including:
  • A cigarette volume decline test that assesses if the transaction can withstand annual declines in cigarette shipments;
  • Payment disruptions by one or more of the participating manufacturers, by market share, at various points over the transaction's term to reflect a Chapter 11 bankruptcy filing; and
  • A liquidity stress test to account for settlement amount disputes by participating manufacturers, as a result of changes to their market share, which has generally shifted to nonparticipating manufacturers.
Our analysis also reflects recent developments in the tobacco industry. We 
believe accelerated cigarette volume declines could pose challenges to cash 
flows in the near future (see "U.S. Combustible Cigarette Volume Decline 
Expected To Accelerate," published April 22, 2019). Our view primarily 
reflects the probable increase in vapor product demand; the high price of 
combustible cigarettes; the likely increase in regulations, including raising 
the minimum age to purchase; and the increased social awareness of the 
negative health effects of smoking.

In reviewing this transaction, it became apparent that there was an 
outstanding covenant default that will be cured in conjunction with S&P Global 
Ratings assigning ratings to the series 2007 bond issuance. Compliance with 
the indenture covenants is generally a condition precedent to offering an 
additional series of bonds, which S&P Global Ratings may rate. 
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