MUNIS-Ohio tobacco bonds get lift from arbitration ruling
Sept 12 (Reuters) - Bonds backed by Ohio's share of a nationwide settlement with U.S. tobacco companies demanded higher prices in the $3.7 trillion municipal bond market on Thursday.
Some bonds issued by Ohio's Buckeye Tobacco Settlement Financing Authority got a lift from an arbitration panel ruling on Wednesday that found the state had basically complied with its part of a 1998 settlement between the companies and 46 states.
"The price appreciation on (the Ohio bonds) outpaced the general market," said Municipal Market Data analyst Domenic Vonella.
A trade on Thursday of $17 million of Buckeye bonds due in 2034 had an average price of 73.015 to yield 8.55 percent, versus a trade on Wednesday of $22.5 million of the bonds at a price of 71.268 and yield of 8.79 percent, according to Daniel Berger, a MMD analyst.
Ohio was one of 15 states whose disputes with the companies over 2003 payments were decided through arbitration. Along with Ohio, eight other states, including New York, Illinois, Iowa, and Washington, won in arbitration, while six lost.
The tobacco companies, which include Philip Morris, a unit of Altria Group Inc, and R.J. Reynolds Tobacco Co, a unit of Reynolds American Inc, argued that the states had failed to diligently collect escrow payments from manufacturers that did not sign the 1998 agreement. That failure entitled participating manufacturers to lower payments.
About $40 billion of tobacco bonds were issued by states, counties and cities. The debt was backed by the more than $200 billion in payments that the cigarette makers agreed to make to them over time to compensate for the cost of caring for sick smokers.
Ohio, which will gain $35 million as a result of the arbitration, disclosed to bondholders in April that it anticipates it will tap reserves for as much as $14.5 million for an interest payment due on Dec. 1. The authority said the action will not constitute a default.
Payment disputes for the years following 2003 still must be resolved, according to Dick Larkin, director of credit analysis at HJ Sims & Co.
"For states that won arbitration yesterday, the likelihood of winning future arbitrations is high, because starting in 2004 and 2005, states began to radically improve their collection and enforcement procedures of the 1998 tobacco settlement's terms," he said in a report on Thursday.
Meanwhile, muni bond prices climbed on Thursday, cutting yields on top-rated bonds as much as 8 basis points on Municipal Market Data's benchmark triple-A scale. Yields on 10-year bonds fell 8 basis points to 2.87 percent, while the 30-year yield dropped by 5 basis points to 4.41 percent, according to MMD, a unit of Thomson Reuters.
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