CHICAGO — Ohio this year will be able to make both debt-service payments on its Buckeye tobacco bonds without having to dip into reserve funds like last year, officials said.
The state made its June 1 principal and interest payment and will be able to make its Dec. 1 interest-only payment without tapping reserves amid an increase in smoking receipts, state debt manager Kurt Kauffman said in an interview Monday.
“We’ll be able to make our payments this year without the liquidity reserve,” Kauffman said.
He added that the state would also be able to make a “very, very small” turbo redemption in 2012.
The Buckeye bonds’ final maturity is 2052, though the state originally projected the bonds to be retired by 2034 as a result of turbo redemptions paid for with surplus collections. With less money available for debt service, the rate of turbo redemptions is now expected to slow or stop in future years.
“Receipts moved up this year and we hope they continue to trend up,” said Kauffman. “We’ll have to see how next year goes.”
Tobacco bonds are backed by payments made under a 1998 Master Settlement Agreement that requires tobacco manufacturers to make annual payments to states based on consumption and other factors.
Tobacco companies have lowered their annual payments for several years amid smoking declines.
But recent figures show that the 2012 payment will be roughly in line with 2011’s payment -- good news for tobacco bond issuers like Ohio.
The three largest tobacco firms that make payments under the MSA are expected to pay $6.5 billion to states in 2012, largely the same as in 2011,
Ohio officials originally projected the companies’ 2012 payment would total $8.1 billion, according to the 2007 tobacco bond documents.
Credit analysts and market participants who track the $50 billion tobacco-bond sector have warned for years that the sector is suffering as smoking declines. The declines translate into lower-than-projected annual payments from the cigarette companies.
Another problem is an ongoing dispute between states and tobacco companies that has prompted the companies to set aside portions of their annual payments into a “disputed payments account.”
Once the dispute is settled -- which could come anytime -- the states will likely see an influx of cash from the accounts.
Ohio in 2007 issued $5.53 billion of tobacco bonds through the Buckeye Tobacco Settlement Financing Authority.
The bonds were structured to withstand a 4% consumption decline, and are considered to have among the thinnest debt-service coverage levels in the sector. More recent tobacco bond issues, in contrast, have built in much more conservative estimates for cash-flow coverage of annual debt-service costs. Illinois’ Railsplitter bonds, for example, allow room for steeper declines of as much as 10% before reserves would have to be tapped.
Last year, Ohio was forced to use reserves to make part of its December payment. In late November, 2011, the state drew $7.4 million from its reserve account to make a $137.4 million Dec. 1 interest payment.
The move left the reserve account $7.4 million below its required $389 million required minimum level and sparked a downgrade from Fitch Ratings. If Ohio drains its reserves, the bonds will remain outstanding longer than expected, exposing investors to what is called extension risk.
Since the beginning of 2012, Buckeye bonds are up 40 basis points and have a yield of 8%.
California and Virginia also relied on reserves to make last year’s payments. California’s Golden State Tobacco Securitization Corp. used reserves to make its recent June 1 payment.