S&P downgrades blns of dollars of muni tobacco bonds

Jan 27 (Reuters) - The credit ratings of billions of dollars of municipal tobacco bonds were downgraded by Standard & Poor's Ratings Services on Friday, partly due to declining smoking rates.

States, counties and cities sold billions of these bonds, which are backed by future payments that cigarette makers agreed to make to help cover the healthcare costs of treating ailing smokers.

When S&P warned it might downgrade a number of these tobacco-backed bonds on Oct. 28, it forecast that shipments of cigarettes would fall between 3.25 percent and 3.75 percent in 2012, and by 2.75 percent to 3.25 percent a year after that.

Yet the most recent data, for 2010, found cigarette shipments fell by 6.37 percent, the credit ratings agency said.

Another problem for this kind of debt is that Marlboro-maker Altria is disputing some of the payments it owes under the 1998 Master Settlement Agreement signed with almost all U.S. states, S&P said.

Not every cigarette-maker agreed to the more than $200 billion settlement with the states.

But the declining smoking rates and the disputed payments cut the cash flow available to repay the debt.

The list of tobacco bonds affected by S&P's ratings decision includes some of the biggest: Ohio's Buckeye Tobacco Settlement Financing Authority debt; California's Golden State Tobacco Securitization Corp's bonds; New Jersey's Tobacco Settlement Financing Corp bonds and New York City's TSAC Inc debt.

A number of the tobacco-backed bonds were already rated as non-investment grade, and S&P's downgrade pushed them further into that territory.

By securitizing the cigarette-makers' payments, the municipalities involved protected themselves from the risk that smoking rates would fall.

'Because these tobacco securitizations do not have any recourse back to the respective state, county, or city, our ratings do not reflect our view of the credit strength of the geographic location that securitized the payment streams,' S&P said.

(Reporting by Joan Gralla) Keywords: MUNICIPALS S&P/TOBACCO

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