Fitch Rates New York Tobacco Settlement Financial Corp's $441MM Asset-Backed Revs 'A+'

Business Wire, March 13, 2008

NEW YORK -- Fitch Ratings assigns its 'A ' rating to the Tobacco Settlement Financing Corporation's (State of New York) $216,590,000 asset-backed revenue bonds, series 2008A (State Contingency Contract Secured) and $224,480,000 asset-backed revenue bonds, series 2008B (State Contingency Contract Secured). The bonds are expected to be offered through negotiation during the week of March 17. Bond proceeds will be used to refund outstanding series 2003A-2 through A-4 bonds and series 2003B-2 through B-4 bonds, which are presently in the form of auction rate securities. The series 2008A and series 2008B bonds will mature serially on June 1, 2009-2012. Simultaneously, Fitch affirms the 'A ' rating on approximately $3.4 billion in outstanding Asset-Backed Revenue bonds (State Contingency Contract Secured). The Rating Outlook is Positive.

While pledged tobacco settlement revenues are the expected source of payment, ultimate security and the assigned rating rests on a contingency contract with the state of New York, under which the state budget director will annually include a request in the state budget for an appropriation equal to debt service on the bonds. The state's general obligation bonds are rated 'AA-', and appropriation debt 'A ', with a Positive Rating Outlook.

The Corporation is a legislatively created subsidiary of the New York State Municipal Bond Bank Agency, legally distinct from the State. Pursuant to a purchase and sale agreement dated June 1, 2003, the state sold to the Corporation pledged settlement payments consisting of 50% of its share of tobacco settlement revenues received under the master settlement agreement (MSA) which provide security for bonds issued under the indenture dated June 1, 2003, as supplemented. The state's remaining 50% share, sold to the Corporation pursuant to purchase and sale agreement dated Dec. 1, 2003, provides security for bonds issued under the indenture dated December 1, 2003, as supplemented. Both series of bonds are separately secured, and under each indenture, the Corporation assigns and pledges the sold settlement payments to the trustee, which are received directly, by-passing the state. The pledged settlement payments will not be subject to legislative appropriations.

Projected debt service coverage from tobacco settlement revenues ranges from 1.3x to 3.6x, providing excess revenues which will be retained in the supplemental account and may only be used for debt service or debt retirement. Therefore, while the previously issued bonds mature in 2023, the bonds are expected to be fully retired in 2016. This structure provides additional enhancement, in the event that payments received by the Corporation are less than those projected in the Global Insight Inc. consumption forecast. Additionally, debt service reserve accounts were funded from initial bond proceeds. In addition to the cash flow considerations, Fitch rates tobacco related securitizations based on its tobacco industry assessment. Fitch currently rates the tobacco industry's overall credit quality 'BBB'. Most standalone 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.

As additional security, the State of New York, acting through the Director of the Budget, entered into two contingency contracts with the Corporation to provide for shortfalls. The Corporation covenants to request from the state by no later than Dec. 15 each year, and certifies the amount of, the debt service due on the bonds in the following fiscal year. The state covenants to request the appropriation in the state budget. If on the fifth day preceding a debt service payment date there is insufficient funds from the pledged settlement payments or the indenture accounts, including the debt service reserve account, the state agrees to pay the debt service due.

Debt service is due each June 1 and Dec. 1 and the state's fiscal year commences each April 1. While the state's payment requires annual legislative appropriations, once in place the state's obligation to fund the debt service requirement is absolute and unconditional. The state has demonstrated its ability to offset late budget adoption risk by consistently appropriating for debt service on all its appropriation backed debt obligations, including contract debt, on a timely basis separate from the budget process. State contracts have been the basis for security in other financings of the state and the vast majority of the state's tax supported debt is secured by appropriations, rather than its general obligation, thereby minimizing appropriation risks.

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