SAN FRANCISCO Dec 3 California officials have
tapped reserves for payments on two series of state tobacco
bonds due to insufficient tobacco settlement revenue, according
to notices filed with Municipal Securities Rulemaking Board on
The draws indicate how municipal bond issuers that sold debt
backed by settlement revenue must contend with the effects of
declining sales of tobacco products.
Moody's Investors Service takes the decline so seriously
that it said in July a majority of tobacco bonds sold by U.S.
states, counties and cities will default if cigarette
consumption keeps falling at a 3 percent to 4 percent annual
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.
Settlement payments may vary from year to year as they are
mainly based the number of cigarettes sold.
The payments follow a Master Settlement Agreement in 1998 to
settle lawsuits launched by states to recover medical costs
associated with smoking-related diseases.
"Most states haven't come close to what they originally
thought they would get," said Dick Larkin, director of credit
analysis at municipal bond broker-dealer HJ Sims.
Larkin added that the reserve draws in California do not
indicate a default brewing. But he said the move should not be a
surprise: "Once they got the (settlement) payment in April
everybody knew it wasn't enough."
The 46 states that participated in the 1998 agreement shared
$6.15 billion in payments in April, up from $6.03 billion in
April 2011, according to the National Association of Attorneys
California sells its tobacco bonds through the Golden State
Tobacco Securitization Corporation, which on Monday issued the
two notices of reserve fund draws.
The first involves the corporation's Enhanced Tobacco
Settlement Asset-Backed Bonds, Series 2005A. The corporation
said it tapped its supplemental reserve account by more than
$2.9 million to pay a portion of an approximately $67.7 million
interest payment on the bonds due on Monday as a result of
insufficient tobacco settlement revenue received in April.
The second draw involved using nearly $6.5 million from a
senior liquidity reserve account to pay a portion of an
approximately $87 million interest payment on Series 2007
Tobacco Settlement Asset-Backed Bonds due Monday, also as a
result of insufficient revenue in April.
Also on Monday, the Nassau County Tobacco Settlement
Corporation said it tapped a senior liquidity reserve account
for $55,464 to pay a portion of an approximately $9.7 million
interest payment due on Monday on its Series 2006 Settlement
The Long Island, New York, agency cited insufficient
agreement payments in April.