U.S. cigarette makers lost a bid to reduce payments to nine states that were part of a landmark 1998 tobacco settlement, an arbitration panel ruled on Wednesday.
The tobacco companies argued that at least 15 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.
New York, Iowa, Ohio, Washington, Colorado, Illinois, Oregon, North Dakota and Maine won their cases while Indiana, Missouri, Pennsylvania, Maryland, Kentucky and New Mexico lost, according to a source involved in the arbitration process.
The cigarette makers won against six states, with the panel ruling those states failed to enforce diligently laws requiring escrow payments, said Philip Morris, which makes Marlboro cigarettes. Philip Morris, which is owned by Altria Group Inc (MO.N), said it will get a $145 million credit as a result.
The other manufacturers involved in the case were not immediately available for comment. They include Camel cigarette maker R.J. Reynolds Tobacco Co, which is owned by Reynolds American Inc (RAI.N), and Newport cigarette maker Lorillard Inc LO.N.
New York will get $92 million, Ohio $35 million and Washington state $14.8 million, according to state officials and a bond analyst. Figures for the other states were not immediately available.
The ruling applies only to payments made in 2003. Payments made in 2004 through 2012 are still in dispute before the panel, made up of three retired federal judges in San Francisco. But New York Attorney General Eric Schneiderman said in a statement that he considered Wednesday's decision a precedent-setting ruling, which "is expected to protect the state from many billions of dollars in future claims."
The arbitrations affect owners of about $40 billion of tobacco bonds issued by states, counties and cities that were backed by the more than $200 billion in payments that U.S. cigarette makers agreed to make to them over time to compensate for the cost of caring for sick smokers.
Moody's Investors Service warned last year that the majority of tobacco bonds will default if cigarette consumption, which helps determine tobacco company payments to states, keeps falling at a 3 percent to 4 percent pace.
"This win is really big deal for tobacco bond issues," said Dick Larkin, director of credit analysis at HJ Sims & Co. He added that states that lost the arbitration will likely see the projections for default on their tobacco bond accelerating.
A 2034 Ohio Buckeye bond traded at 71.5 cents on the dollar on Wednesday up from 68.5 cents last week, at a yield of 8.75 percent down from 9.15 percent, said Daniel Berger analyst at Municipal Market Data.
The tobacco settlement, first signed in November 1998, resolved claims by states and territories. In exchange, the companies agreed to make annual payments based on their annual cigarette sales.
The panel's decisions do not affect 22 states and jurisdictions that settled the dispute over the last year.
(Reporting by Karen Freifeld in New York and Karen Pierog in Chicago; Writing by Tiziana Barghini; Editing by Lisa Shumaker)