U.S. states welcome tobacco settlement, bond woes remain
WASHINGTON (Reuters) - A recent deal with tobacco companies will distribute money to 17 states that has been tied up for years, but the funds may only provide short-term relief to underfunded tobacco bonds.
Cigarette makers including Philip Morris USA and R.J. Reynolds Tobacco Co announced this week a settlement with the states in a long-running dispute over the amount of payments they are required to make under the 1998 landmark anti-smoking agreement. On Wednesday, prices for long tobacco bonds rose following news of the settlement.
The settlement gives states a share of $4 billion in disputed payments. The manufacturers will receive credits against future payments.
The 1998 agreement, which involved almost all 50 states, included a section designed to level the playing field between companies that signed it and those that did not. It cut the signing companies' payments to the states by an amount equivalent to the market share the companies lost to the firms that did not sign the agreement.
Those reductions created a long-standing fight, with the participating companies arguing that their sales are not big enough to justify payments. They put the sums they dispute into escrow, keeping states and the District of Columbia and Puerto Rico from collecting the money.
"The settlement, if approved, will increase the amount of money that the District receives," said David Umansky, spokesman for Washington D.C.'s chief financial officer. "In particular, the settlement will limit the ability of tobacco companies to withhold amounts from future payments to the District."
Georgia will get $56 million in 2013 from the settlement, said Attorney General Sam Olens, adding that the agreement saved the state legal costs and ensures continued cash flows in the future that are now mostly used for health programs.
"We did not securitize any of our tobacco funds. It will not impact any of our outstanding debts," said Susan Ridley, director of Georgia's Financing and Investment Division.
Arkansas only sold about $5 million bonds, and the $24.2 million it receives in 2013 from the settlement will mostly go to the state's public health programs dealing with cigarette addiction, according to Phelps.
States, counties and cities have sold nearly $40 billion of bonds backed by the more than $200 billion in payments that U.S. cigarette makers agreed to make to them over time.
Recently, rating agencies have raised red flags that declining tobacco consumption could affect the future of those bonds. The recent settlement will provide certainty and will free up some cash, but it will likely not wipe out the risk of defaults on the debt, said Richard Larkin, the senior vice president of Herbert J. Sims & Co., Inc. who spent most of Wednesday parsing the settlement.
"I know this is good for tobacco bonds but it's not like it completely solved the shortfall problems," he said, noting the companies' credits will essentially mean states do not receive the total sum they anticipated. "They're not going to get as much money as they originally thought but they're going to get more money than they were getting."
"It's just going to delay the year when they run out of money and they don't have enough to cover all their bonds. It's a major development, but it's very complicated," added Larkin, who closely monitors tobacco bonds.
California, one of the largest issuers of tobacco bonds, said the settlement would provide no new net benefit to its bottom line. The bonds were sold by the Golden State Tobacco Corporation, which in turn paid the state, according to the state's treasury department, and that corporation is entitled to any proceeds.
Attorneys general for other major tobacco bond issuers New Jersey and Virginia did not respond to requests for comment. According to Standard & Poor's, Virginia has sold more than $1 billion tobacco bonds, and New Jersey more than $3.5 billion.
In 2011 Ohio, California and Virginia all had to tap reserves to repay bondholders.
The other states in the settlement - Alabama, Arizona, Kansas, Louisiana, Michigan, Nebraska, Nevada, New Hampshire, New Jersey, North Carolina, Tennessee, West Virginia and Wyoming - also could not be reached for comment. Puerto Rico is part of the settlement, as well.
In July, Moody's Investors Service warned that the majority of tobacco bonds will default if cigarette consumption keeps falling at a 3 percent to 4 percent pace. The debt, though, often outperforms the rest of the $3.7 trillion U.S. municipal bond market.
(Reporting by Lisa Lambert, Additional reporting by Michael Connor in Miami; editing by Andrew Hay)
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