Tobacco Settlement Finance Authority (Series 2020A and 2020B)

Presale: Tobacco Settlement Finance Authority (Series 2020A And 2020B)

October 14, 2020

PRIMARY CREDIT ANALYST

Preliminary Rating Elizabeth T Fitzpatrick New York Series Class Maturity date Preliminary rating Preliminary amount ($) (1) 212-438-2686 2020A 1 June 1, 2021 A (sf) 19,180,000 elizabeth.fitzpatrick @spglobal.com 2020A 1 June 1, 2022 A (sf) 19,530,000 SECONDARY CONTACTS 2020A 1 June 1, 2023 A (sf) 18,530,000 Jie Liang, CFA 2020A 1 June 1, 2024 A (sf) 18,530,000 New York 2020A 1 June 1, 2025 A (sf) 18,040,000 (1) 212-438-8654 jie.liang 2020A 1 June 1, 2026 A (sf) 18,145,000 @spglobal.com

2020A 1 June 1, 2027 A (sf) 18,550,000 Mariana Gurevich

2020A 1 June 1, 2028 A (sf) 18,875,000 New York + 1 (212) 438 2156 2020A 1 June 1, 2029 A (sf) 18,865,000 mariana.gurevich @spglobal.com 2020A 1 June 1, 2030 A (sf) 18,750,000 ANALYTICAL MANAGER 2020A 1 June 1, 2031 A- (sf) 18,695,000 Ildiko Szilank 2020A 1 June 1, 2032 A- (sf) 18,330,000 New York 2020A 1 June 1, 2033 A- (sf) 18,350,000 (1) 212-438-2614 2020A 1 June 1, 2034 A- (sf) 17,015,000 ildiko.szilank @spglobal.com 2020A 1 June 1, 2035 A- (sf) 17,645,000

2020A 1 June 1, 2040 A- (sf) 98,255,000

2020A 1 June 1, 2045 BBB+ (sf) 89,705,000

2020A 1 June 1, 2049 BBB+ (sf) 71,035,000

2020B 2 June 1, 2035 BBB (sf) 63,920,000

2020B 2 June 1, 2049 BBB- (sf) 108,680,000

Note: This presale report is based on information as of Oct. 14, 2020. The rating shown is preliminary. Subsequent information may result in the assignment of final rating that differs from the preliminary rating. Accordingly, the preliminary rating should not be construed as evidence of final rating. This report does not constitute a recommendation to buy, hold, or sell securities.

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© S&P Global Ratings. All rights reserved. No reprint or dissemination without S&P Global Ratings' permission. See Terms of Use/Disclaimer 2534232 on the last page. Presale: Tobacco Settlement Finance Authority (Series 2020A And 2020B)

Profile

Expected Oct. 28, 2020 closing date

Collateral West Virginia's state-pledged tobacco settlement revenues resulting from the master settlement agreement payments, the fully funded liquidity reserve accounts, and the interest income.

Issuer Tobacco Settlement Finance Authority (West Virginia).

Trustee Wells Fargo Bank N.A.

Rationale

The preliminary ratings assigned to the Tobacco Settlement Finance Authority's (West Virginia) taxable tobacco settlement asset-backed refunding bonds series 2020 senior bonds reflect our view of:

- The likelihood that timely interest and scheduled principal payments will be made by the legal maturity date under the appropriate rating stress level;

- The credit quality of the two largest participating tobacco manufacturers: Altria Group Inc., parent of Philip Morris USA Inc., and British American Tobacco PLC, parent of Reynolds American Inc.;

- The transaction's legal and payment structures; and

- The class 1 and 2 senior liquidity reserve accounts of $36.07 million and $7.30 million, respectively, which will be fully funded at closing and only available to their respective classes.

The issuer is a public entity created by the state of West Virginia and has a legal existence distinct from the state. It does not constitute a state government department and the issuer's obligations do not constitute obligations of the counties or state.

The state of West Virginia's full share of the annual payments under the master settlement agreement (MSA) equals approximately 0.8864604%. The state sold all its right, title, and interest to the state's tobacco authority, which in turn has pledged 100% of its allocation to the series 2020 asset-backed refunding bonds and the remaining series 2007 asset-backed bonds. The state's share of the annual payments are the only amounts available to noteholders. The 2020 senior refunding bonds will be issued pursuant to an amended and restated trust indenture and a series 2020 supplement. The authority will use the proceeds from the issuance of the series 2020 senior bonds, together with other available funds, to (i) refund (x) all of the authority's series 2007A tobacco settlement asset-backed bonds through redemption and defeasance and (y) a portion of the series 2007B bonds through payment of the purchase price thereof and cancellation, as well as (ii) fund the debt service account and the debt service reserve account and pay transaction-related expenses. All of the series 2020 refunding bonds are current-interest bonds.

While the 2007A bonds will be refunded in their entirety with the issuance of the series 2020 bonds, a portion of the 2007B bonds will remain outstanding. These are senior capital appreciation bonds, and as such, are not due any payments until the series 2020 class 1 and class 2 bonds are fully paid. Per the transaction documents, a capital appreciation bond payment default is not an Event of Default while the series 2020 bonds are outstanding.

Based on our cash flow analysis, the series 2020 bonds fall into the 'A', 'A-', 'BBB+', 'BBB', and

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'BBB-' rating categories (see the Cash Flow Analysis section) due to the following:

- The series 2020A senior serial bonds that mature in 2021 through 2030, inclusive, passing each of the 'A' rating level tests, consumption stress, and sensitivities. Therefore, we assigned our preliminary 'A (sf)' ratings to the 2021 to 2030 maturities.

- The series 2020A senior serial bonds that mature in 2031 through 2035 pass each of the 'A' rating level tests, consumption stress, and sensitivities. Because these bonds mature in more than 10 years, they were notched down one rating subcategory, as we typically do for all tobacco securitization bonds. The longer time horizon to the legal maturity date increases the uncertainty of our projections and the potential for event risk in the tobacco industry and tobacco securitizations. As a result, we believe the preliminary ratings on the bonds with longer maturity profiles should be more closely tied to the tobacco industry's business risk profile and the current ratings on the two largest tobacco manufacturers. Therefore, we assigned our preliminary 'A- (sf)' ratings to the 2031-2035 maturities.

- The series 2020A senior term bonds that mature in 2040 passing each of the 'A' rating level tests, consumption stress, and sensitivities. Because these bonds mature in more than 10 years, they were notched down one rating subcategory, as we have done for all tobacco securitization bonds. Therefore, we assigned our preliminary 'A- (sf)' rating to the 2040 term bonds.

- The series 2020A senior term bonds that mature in 2045 and 2049 passing each of the 'A' rating level tests, consumption stress, and sensitivities. Because these bonds mature in more than 20 years, they were notched down two rating subcategories, as we have done for all tobacco securitization bonds. Therefore, we assigned our preliminary 'BBB+ (sf)' rating to the 2045 and 2049 term bonds.

- The series 2020B senior turbo term bonds that mature in 2035 passing the volume decline, participating manufacturer (PM) bankruptcy, and nonparticipating manufacturer (NPM) adjustment tests at an 'A' level but passing one of the sensitivity runs at the 'BBB+' level. Because these bonds mature in more than 10 years, they were notched down one rating subcategory as we have done for all tobacco securitizations. Therefore, we assigned our preliminary 'BBB (sf)' rating to the 2035 turbo term bonds.

- The series 2020B senior turbo term bonds maturing in 2049 passing the volume decline test at an 'A' level, the largest non-investment grade PM bankruptcy at a 'BBB' level, and the NPM adjustment at an 'A' level, but were notched down for maturity. Therefore, we assigned our preliminary 'BBB- (sf)' rating to the 2049 turbo term bond.

Transaction Strengths And Weaknesses

Strengths

The transaction's strengths, in our view, include:

- The availability of the $36.07 million and $7.30 million fully funded liquidity reserve accounts to pay interest and principal when due for the series 2020 class 1 and 2 bonds, respectively;

- The existence of turbo redemption features that could accelerate amortization of the series 2020B bonds, which we believe could more effectively mitigate the risks related to cigarette consumption forecasts and the potential market share shifts to NPMs from the participating tobacco manufacturers, as well as a lower interest expense; and

- The investment-grade (rated 'BBB-' and above) credit quality of the two largest tobacco

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manufacturers that make most of the MSA payments.

Weaknesses

The transaction's weaknesses, in our view, include:

- The continued, and potentially greater, decline in cigarette shipments as a result of: higher excise taxes imposed by the federal, state, and local governments; price increases by manufacturers; or the passage of new regulations (including increasing the legal age to purchase to 21, which Congress enacted in 2019, or banning the sale of menthol cigarettes in California, which becomes effective in January 2021), restricting locations where cigarettes can be smoked, and requiring changes to packaging to highlight health risks (see "Combustible Cigarette Volume decline Expected to Accelerate," published April 22, 2019).

- The litigation risk (current and future lawsuits) against tobacco manufacturers and the claims challenging the MSA or qualifying statutes.

- The increase in the popularity of alternative tobacco products--the sales of which would not result in payments under the MSA.

Mitigating factors

The factors that partly mitigate the transaction's weaknesses include the following:

- Our additional cash flow runs, which include scenarios designed to test the transaction's sensitivity to event risks. These scenarios include a market shift in NPMs, a one-time steep decline in cigarette consumption, and periodic steeper-than-historical average declines in cigarette shipments. Also, we recently added an additional consumption stress run, which is further explained in "U.S. Tobacco Settlement Revenue Securitizations Ratings Placed on CreditWatch Negative," published May 10, 2019.

- The U.S. tobacco industry is continuing to face hurdles and class-action lawsuits, such as Engle Progeny, that allege cigarette manufacturers used unfair and deceptive trading practices when claiming that so-called "light cigarettes" were lower in tar and nicotine or were less hazardous than other cigarettes. Lawsuits may always arise, but it becomes more difficult over time for remaining smokers to claim they were not aware of health risks.

- The FDA is currently considering numerous cigarette regulations. This, and the likelihood of more to come, remain a risk to the industry and this transaction. However, we believe the major U.S. tobacco companies will successfully navigate these risks thanks to their regulatory expertise, deep financial resources, and protections afforded by the U.S. Constitution (see "The U.S. Tobacco Industry is Still Standing Tall Despite Increased Regulatory Risks," published Aug. 11, 2016).

- Alternative tobacco products still account for a small segment of the overall tobacco market, and new products need approval from the FDA, which currently have a large backload of products seeking approval. Currently, electronic cigarettes are subject to increasing legislation. In February 2020, the House passed legislation making flavored tobacco illegal. Most forecasts assume the bill will not get approved in the Senate, and the White House has already stated it will veto it. In April 2019, the FDA cleared the heat not burn (HNB) product for sale. However, we believe these HNB cigarettes will be included in the MSA definition of cigarettes and, therefore, included in the volume calculation.

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Industry Characteristics: Sector Outlook

S&P Global Ratings' general outlook on the tobacco industry reflects its view of the following:

The U.S. cigarette industry is mature, competitive, and highly concentrated, with the two major tobacco manufacturers controlling approximately 85% of the market.

We assume annual U.S. cigarette volumes will decline by 4.00%-4.50% going forward (4.25% midpoint). This compares to our previous annual decline assumption of 3.00%-4.00%.

Primary drivers for the accelerated decline assumption include the potential increase in vapor products, including HNB, product demand, the high price of combustible cigarettes, and increased social awareness of the negative health effects of smoking, including through years of heightened regulation.

Our revised decline assumptions exclude the potential for a ban on menthol in cigarettes (which we believe could occur over the next five years) or reduced nicotine content in cigarettes to minimally or non-addictive levels (which we believe could occur over the next 10-15 years). Both of these risks--should they materialize--would probably lead to incremental volume declines. California recently joined with other states by banning flavored tobacco products, including menthol, which goes into effect Jan. 1, 2021. We expect tobacco sales to remain flat in 2020 compared to 2019. This incorporates our assumption that unit volumes will vary as cigarette smokers stock up and subsequently use up their supply of tobacco products. Ultimately, pricing will continue to offset low- to mid-single-digit percentage secular volume declines, while free cash flow generation should remain solid. We don't expect much runway for electronic cigarettes, given the potential for lingering consumer doubts following the occurrence of lung illness and--at least for small competitors--the May 2020 U.S. FDA deadline to submit product applications to stay on the market. We also believe Altria Group Inc./Philip Morris International Inc.'s new iQOS HNB cigarette will face near-term growth hurdles, given lower traffic and the likely difficulty holding face-to-face demonstrations to use the new product.

The industry is characterized by high profit margins and low capital expenditure requirements, resulting in significant free cash flow generation.

Manufacturers enjoy significant pricing power. This pricing power (across most tobacco products, including cigarettes, cigars, and smokeless tobacco) and higher non-cigarette product volumes more than offset the lower cigarette volumes.

We view the FDA's multiyear plan to reduce nicotine in combustible cigarettes, if enacted, as a long-term risk to the industry. However, there is significant uncertainty whether the package of proposals could be enacted, and we believe the timeframe for any implementation would be at least five, and perhaps even 15, years. We do not believe there will be a fundamental impact on near-term profits and cash flow-generating ability.

Litigation is an ongoing risk factor. Although the trends over the past decade have been generally favorable, the future is uncertain.

Philip Morris International Inc. received approval to start selling its HNB product in the U.S. in April 2019 through Philip Morris USA as its exclusive agent. Reynolds American Inc., a subsidiary of British American Tobacco PLC, is probably not far behind with its Glo product. It is possible that HNB products could resonate well with smokers, depending on the satisfaction derived from such new products and the cost relative to combustible cigarettes. The MSA's definition of a cigarette includes products that heat, although it is not entirely clear whether those products will be included in the MSA. We do not believe there will be a material impact on MSA payments over the

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near term. However, if HNB (or other next generation) products win market share from combustible cigarettes and are excluded from the MSA, payments under the securitization could decline.

The MSA

The series 2020 bonds are collateralized by the payments PMs make under the MSA that are due to the state of West Virginia. The state is pledging 100% of the 0.8864604% allocation it receives under the MSA to the tobacco settlement asset-backed bonds.

The MSA was signed in 1998 and settled various lawsuits filed by 46 U.S. states, Washington, D.C., and several U.S. territories against the four major cigarette manufacturing companies, known as original participating manufacturers (OPMs). The OPMs were Philip Morris, R.J. Reynolds Tobacco (Reynolds), Brown & Williamson Tobacco Co. (B&W), and Lorillard Tobacco Co. (Lorillard), until Reynolds subsequently acquired B&W (July 2004) and Lorillard (June 2015), leaving only two OPMs. In 2017, Reynolds was purchased by British American Tobacco PLC. However, Imperial Brands PLC, formerly Imperial Tobacco Group PLC, purchased certain cigarette brands that Reynolds and Lorillard divested in the 2015 merger, and it makes MSA payments on these brands as an OPM. Various smaller tobacco manufacturers, known as subsequent participating manufacturers (SPMs), also joined the MSA. Under the MSA, the PMs must pay each municipal entity listed in the MSA annually indefinitely.

The MSA provides that payment amounts will be divided among the PMs based on market share. The MSA assumes that if a company stops manufacturing cigarettes, that company's market share would be reallocated among the remaining manufacturers. As long as the remaining companies continued to participate in the MSA, there would likely only be a temporary loss of settlement revenues. These losses would likely be eventually recaptured if the remaining participating companies absorbed the lost company's market share. To that end, rather than taking a company-specific approach, the MSA provides for an industry approach that accounts for the industry's overall strength.

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Adjustment To The MSA

The MSA payments are calculated by an independent auditor and are subject to a number of adjustments. Assumptions about these adjustments can materially affect the projected revenues. The main adjustments have historically been for inflation, annual shipment volume, and NPM adjustments.

The MSA recognizes that the PMs' payment obligations could result in certain cost disadvantages to the PMs that could subsequently shift market share to the NPMs away from the PMs. To level the economic playing field, the MSA states that the PMs may reduce their annual MSA payment obligations by asserting their right to claim an NPM adjustment because of these cost disadvantages. Historically, this resulted in reductions that were disputed and a large balance in the disputed payment account.

In December 2012, the three OPMs at that time, and some of the SPMs, reached an agreement initially with 19 jurisdictions (including West Virginia ) to resolve longstanding disputes related to the NPM adjustment disputes from 2003-2012. The agreement, as put forth in the NPM adjustment settlement term sheet, includes a release to the signatory states of their portion of more than $4 billion from the MSA disputed payment account. In return, the PMs made lower future MSA payments until 2017. In October 2017, the term sheet was finally structured into a formal agreement.

In 2018, a separate agreement extended the settlement through 2017. Although the term sheet somewhat clarifies NPM compliance requirements for the signatory states, future disputes could still arise relating to NPM adjustments.

In July 2020, the 2018-2022 NPM adjustment settlement was passed, which laid out the terms to resolve the disputed NPM adjustment amounts from sales years 2018 to 2022. During these years, the states will not be subject to an NPM adjustment. Consequently, (i) the amounts previously withheld by the PMs for the 2018 and 2019 sales years would be released to the signatory states in the 2021 and 2022 payment years, respectively, and (ii) no payment withholdings will be permitted for the 2020-2022 sales years in payment years 2021-2023, respectively. There will also be payment credits to the PMs equal to 25% of the potential maximum NPM adjustment for sales years 2018 to 2022 in payment years 2021 to 2025, respectively.

Collateral

Under the MSA, the State is entitled to 0.8864604% of the annual payments made by PMs under the MSA.

Tobacco Settlement Finance Authority (West Virginia) taxable tobacco settlement asset-backed refunding bonds series 2020 senior bonds are special revenue obligations of the issuer secured solely by and payable solely from the pledged TSRs and the other collateral pledged under the trust indenture.

Table 1

Actual State Receipts Of Pledged Tobacco Settlement Revenues

Fiscal year Actual receipts (mil. $)(i)

2011 62.45

2012 63.67

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Table 1

Actual State Receipts Of Pledged Tobacco Settlement Revenues (cont.)

Fiscal year Actual receipts (mil. $)(i)

2013 89.96

2014 63.56

2015 63.11

2016 62.42

2017 64.04

2018 61.26

2019 59.60

2020 56.71

(i)Amounts are set forth to the best of the issuer's knowledge. Any adjustment is reflected in the period in which it was actually made.

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Transaction Structure

The Agency is issuing $708,625,000.00 of series 2020A senior serial, senior term, and series 2020B senior term bonds with legal maturity dates between 2021 and 2049.

Interest on the series 2020 senior bonds will be payable semi-annually on June 1 and December 1 of each year, commencing Dec. 1, 2020.

Principal is payable on the series 2020 senior bonds on their respective scheduled maturity dates and, with respect to the series 2020A senior bonds that are term bonds, on the fixed sinking fund installment dates. Principal is also payable on the series 2020B senior bonds by turbo redemptions in accordance with the prescribed payment priorities.

The funds available for principal and interest will be paid to the series 2020 noteholders until the senior bonds are fully redeemed.

The class 1 senior bonds that are current interest bonds will be fully paid in chronological order of serial maturities, fixed sinking fund installments, and maturity dates. The class 2 senior bonds that are current-interest bonds will be fully paid in chronological order by maturity date and within a maturity, pro rata in accordance with the indenture. Any senior bonds that are capital appreciation bonds are fully paid in chronological order by maturity date and within a maturity, pro rata in accordance with the indenture. The subordinate bonds, if any, will be fully paid.

Cash Flow Analysis

S&P Global Ratings applied a quantitative analysis to the following cash flow stress tests:

- A cigarette volume decline test, which is intended to assess the transaction's ability to withstand steeper-than-historical average annual declines in U.S. cigarette consumption;

- A PM bankruptcy test, in which we assume the largest PM's Chapter 11 bankruptcy, and the subsequent temporary payment stoppage at various points over the transaction's term; and

- The NPM adjustment of 15% (commencing in 2023 due to the 2018-2022 NPM adjustment settlement) with 50% of the cash being paid through to the state each period, based on the terms of the NPM settlement agreement, and a recovery of 50%, starting at year 16 (which is based on the current estimate for the settlement of 2004 NPM adjustments).

We expect a security rated at the 'A' rating level (before the application of maturity-based rating adjustments) to pass all three ratings tests, with timely interest and ultimate principal payments.

We used the following cash flow assumptions for the stress tests for the bonds that will be considered for ratings at the 'A' level:

- Cigarette shipments decline 5.75%. This is stressed compared to the criteria to reflect current market conditions (see "U.S. Tobacco Settlement Revenue Securitizations CreditWatch Placement Resolved," published Oct. 24, 2019).

- Market share shifts as follows: OPMs decreases to 81.00% from 83.00%, SPMs decrease to 9.00% from 10.00%, and NPMs increase to 10.00% from 7.00%. We apply these stresses to market share shifts in equal increments over 10 years. After 10 years, we assume market share will remain stable. The higher the market share assumption for the NPMs, the more stressful it is for the transaction since it reduced the amounts made to the MSA.

- The NPM adjustment will be 15% (commencing in 2023 due to the 2018-2022 NPM Adjustment

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Settlement) with 50% of the cash being paid through the state each period per the agreement's terms and a recovery of 50% starting at year 16 (which is based on the current estimate for the settlement of the 2004 NPM adjustments).

For a more detailed description of these stress tests and our current assumptions and rationale, see "U.S. Tobacco Settlement Securitization: Ratings Methodology And Assumptions," published March 24, 2016

Cash Flow Analysis Results

Below is the result of our standard rating tests. The volume decline test is at the current volume additional stress level, which is a 5.75% constant decline for an 'A' run (see

"U.S. Tobacco Settlement Revenue Securitizations CreditWatch Placement Resolved," published Oct. 24, 2019).

Table 2

Standard Stress Test Results(i)

Series Maturity date Volume decline stress PM bankruptcy NPM stress

2020A 6/1/2021 A A A

2020A 6/1/2022 A A A

2020A 6/1/2023 A A A

2020A 6/1/2024 A A A

2020A 6/1/2025 A A A

2020A 6/1/2026 A A A

2020A 6/1/2027 A A A

2020A 6/1/2028 A A A

2020A 6/1/2029 A A A

2020A 6/1/2030 A A A

2020A 6/1/2031 A A A

2020A 6/1/2032 A A A

2020A 6/1/2033 A A A

2020A 6/1/2034 A A A

2020A 6/1/2035 A A A

2020A 6/1/2040 A A A

2020A 6/1/2045 A A A

2020A 6/1/2049 A A A

2020B 6/1/2035 A A A

2020B 6/1/2049 A BBB A

(i)Results reflect the highest rating level passed. PM--Participating manufacturer. NPM--Nonparticipating manufacturer. NR--Not rated.

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Sensitivity Analysis

We designed the following additional stress tests to assess the transaction's sensitivity to event risks because of a tobacco manufacturer's potential bankruptcy, regulatory changes, or other events that might result in a one-time or periodic reduction or potential disruption in the MSA payments.

In addition to our assessment of the standard stress tests described above, the preliminary ratings reflect our assessment of the transaction's ability to withstand the following stresses:

- A greater market share shift to the NPMs from the PMs than assumed in our standard stress test;

- A one-time steep decline in cigarette consumption (due to what we consider to be an unlikely outright ban of menthol cigarettes, for instance); and

- Periodic price jumps or other events that we believe will likely lead to steeper long-term average declines in cigarette consumption.

We believe these event risks have a different likelihood and cash flow effect than the three rating stresses above, and we do not necessarily expect the transaction to pass all of them. However, we believe it is beneficial to highlight the scenarios in which the transaction exhibits higher sensitivity.

The series 2020A bonds with maturities between 2021 and 2049 passed all three tests at the 'A' level, but were then notched down based on their maturities. The series 2020B turbo term bonds maturing in 2035 did not pass the 'A' level one-time 30% steep decline if it was applied in year one, but did pass the 'BBB+' sensitivity test of 20% decline in year one and also passed the 'A' level test if it was applied at year six or later. The series 2020B turbo term bonds maturing in 2049 did not pass the largest PM bankruptcy test but did pass the speculative-grade PM bankruptcy test. Therefore, we only ran the 'BBB' level sensitivities, and the 2020B turbo term bond maturing in 2049 passed all of these sensitivity cash flow runs.

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Payment Priority

The preliminary ratings reflect our view that the transaction will pay timely interest and scheduled principal at each bond's stated maturity date. On each June 1 and December 1 payment date, the funds will be distributed in the order of priority in the transaction documents. Because the MSA payments are made annually (on or about April 15), but the transaction's liabilities have a semiannual pay structure, the interest for the December payment is reserved when the MSA payments are received. Interest payments for this transaction will begin in December 2020.

Events Of Default

Under the authority's transaction documents, each of the following constitutes an event of default (among other events):

- A class 1 senior bond payment default (including fixed sinking fund installments);

- A failure to pay turbo redemptions with respect to class 1 senior bonds when due, but only to the extent moneys are available and the failure of the authority to observe or perform any other provision of the trust indenture, not remedied within 60 days after written notice.

Note that failure of the authority to make a turbo redemption payment due to insufficiency of funds shall not constitute a default. Additionally, a capital appreciation bond payment default is not an event of default while the series 2020 bonds are outstanding, per the transaction documents.

Legal

In rating this transaction, S&P Global Ratings will review the legal matters it believes are relevant to its analysis, as outlined in its criteria.

Surveillance

According to our surveillance criteria, we will periodically review this transaction to assess whether the ratings continue to reflect our view of the transaction's performance, and we will take any rating action that, based on our criteria, we consider to be appropriate. In addition, we will be monitoring the ratings on the PMs and their respective market share.

The potential effects of the COVID-19 pandemic and the resulting recession is not likely to cause a significant enough change in tobacco consumption to warrant additional stresses. We will continue to monitor any consequences of the pandemic that could affect the sector and take into account changes specific to this transaction when appropriate.

S&P Global Ratings acknowledges a high degree of uncertainty about the evolution of the coronavirus pandemic. The current consensus among health experts is that COVID-19 will remain a threat until a vaccine or effective treatment becomes widely available, which could be around mid-2021. We are using this assumption in assessing the economic and credit implications associated with the pandemic (see our research here: www.spglobal.com/ratings). As the situation evolves, we will update our assumptions and estimates accordingly.

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Related Criteria

- Criteria | Structured Finance | Legal: U.S. Structured Finance Asset Isolation And Special-Purpose Entity Criteria, May 15, 2019

- Criteria | Structured Finance | General: Counterparty Risk Framework: Methodology And Assumptions, March 8, 2019

- General Criteria: Methodology And Assumptions For Stressed Reinvestment Rates For Fixed-Rate U.S. Debt Obligations, Dec. 22, 2016

- Criteria | Structured Finance | ABS: U.S. Tobacco Settlement Securitization: Ratings Methodology And Assumptions, March 24, 2016

- General Criteria: Global Investment Criteria For Temporary Investments In Transaction Accounts, May 31, 2012

- General Criteria: Principles Of Credit Ratings, Feb. 16, 2011

Related Research

- U.S. Tobacco Settlement Revenue Securitizations Ratings Placed On CreditWatch Negative, May 10, 2019

- Combustible Cigarette Volume decline Expected to Accelerate, April 22, 2019

- Volume Declines: Interpreting The Smoke Signals For The U.S. Cigarette And Tobacco Industry, May 7, 2018

- Tobacco Securitization Criteria Will Remain Unchanged Following the FDA's Nicotine Reduction Announcement, Aug. 15, 2017

- Credit FAQ: The FDA's Plan To Take Aim At Combustible Cigarettes Could Hurt Large Tobacco Companies If Regulations Follow, Aug. 9, 2017

- Global Structured Finance Scenario And Sensitivity Analysis 2016: The Effects Of The Top Five Macroeconomic Factors, Dec. 16, 2016

- Research Update: U.K.-Based British American Tobacco On CreditWatch Negative Following Merger Proposal, Oct. 26, 2016

- U.S. Tobacco Companies Face Persistent But Diminishing Litigation Risks, Aug. 11, 2016

- The U.S. Tobacco Industry is Still Standing Tall Despite Increased Regulatory Risks, Aug. 11, 2016

- U.S. Tobacco Settlement Securitization: Ratings Methodology And Assumptions, March 24, 2016

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Standard & Poor’s | Research | October 14, 2020 14 2534232