DALLAS — States that signed on to the 1998 Master Settlement Agreement with tobacco companies are counting down to April 17, the deadline for 2006 payments made under the terms of the agreement.
Although Philip Morris USA last week made its full MSA payment — $3.4 billion — officials from R.J. Reynolds Tobacco Co. and Lorillard Tobacco Co. say that they have not yet decided whether or not they would adjust their 2006 payments per a March 28 arbitration decision handed down by the Boston-based Brattle Group.
The entire scheduled payment by tobacco companies — not just the three majors, but also a handful of smaller companies that have signed on to the MSA since 1998 — is about $6.5 billion.
Payments by the large companies account for the vast majority of revenue to the 46 states and six territories that signed the MSA. Had all three of the majors opted to take advantage of the Brattle Group’s determination that the companies could lower their payments because of market share lost in 2003 — a hit of about $1.2 billion — municipal tobacco bonds backed by securitized MSA payments could have been in jeopardy, with some issuers forced to delve into reserves to meet debt service obligations this year.
However, with Philip Morris’ full payment, most analysts agree that any reduction in MSA payments by Reynolds or Lorillard would only affect the immediate repayment of some turbo bonds.
Whatever course the companies take — making full payments on or before April 17, withholding part of their payment, or placing that disputed amount into an escrow account — states will have to prove to the majors that they have adequately enforced escrow statutes mandated by the MSA.
Those so-called model statutes were written into the agreement to guarantee that companies that do not participate in the MSA — the non-participating manufacturers, or NPMs — did not gain market share because they could undercut the prices of those companies that had to factor MSA payments into their cost of business.
Those states that do prove that they have “diligently enforced” the model statutes will receive their MSA payments in full. Any states that are found to have not diligently enforced the statutes could lose part or all of their 2006 payments.
The arbitration of diligent enforcement will proceed on a state-by-state basis and could take several years, officials say.
Last week, an appellate court in New York ruled that the state did, in fact, have to go through the arbitration process as defined under the terms of the MSA.
New York Attorney General Eliot Spitzer had argued that the state should not have to wait for the matter to be resolved via arbitration. Instead, the state had asked the court to rule on the issue of diligent enforcement immediately.
Despite the wait to see what the MSA payment for 2006 will be, tobacco bonds continue to trade in the low 5% range — exactly where they were trading prior to the Brattle Group’s decision.
Analysts say that because the arbitration process will be lengthy, it makes no sense to jump to the conclusion that tobacco companies and MSA payment recipients won’t either reach a consensus about the 2006 payment or that the states will be found to not have diligently enforced the model statutes.
All three rating agencies have released reports in the last few weeks stating that the Brattle Group’s decision on its own is not enough to warrant any ratings action.
A Fitch Ratings report released yesterday indicated that the matter would not affect new bonds backed by MSA payments. In that report, Fitch analysts rated three series of subordinate debt worth about $30 million issued by the California County Tobacco Securitization Agency on behalf of the Fresno County Tobacco Funding Corp.
The ratings include a BBB for the Series 2006A turbo capital appreciation bonds, a BBB-minus for the Series 2006B turbo capital appreciation bonds, and a BB for the Series 2006C bonds.
Fitch did not rate a fourth tranche of Series 2006D bonds.
Concerns about a possible NPM adjustment are also not thwarting the possibility of tobacco bonds this year from additional issuers. Arkansas Gov. Mike Huckabee just approved a $40 million deal backed by the state’s $1.6 billion share of the MSA, and Colorado lawmakers are looking at a measure that would authorize the securitization of the state’s $1 billion share of the $206 billion agreement.
