S&P: Good Year for Tobacco Bonds, but Risks Remain

Annual payments into the tobacco Master Settlement Agreement for 2003-2012 increased this year to $7.5 billion from last year's $6.15 billion, according to Standard & Poor’s.

The payments into the MSA have been securitized by a number of states by issuing bonds with up to 50 years of maturity.  

S&P said in a report today that the increase in payments is thanks to the slowdown in tobacco consumption decline, which in 2012 was less than 2% for the first time in six years and the release of a portion of the funds relevant to the settlement between 17 U.S. states, the District of Columbia, and Puerto Rico and several tobacco manufacturers resulted in an increase in the overall annual payment to $7.5 billion from last year's $6.15 billion.

But S&P said that the boost in payments won’t be enough to offset the large decline in payments from 2009 and 2010, following the 2009 increase in the federal excise tax.

“The large declines in 2009 and 2010 are potentially irreversible unless there is significantly higher inflation combined with a positive shift in consumption,” explained S&P.

An increased decline of consumption that could be greater than 4%, with a possible increase to the federal excise tax would lead to lower MSA payments in 2014.

 “Depending on a number of issues--including the outcome of the remainder of the states/territories that did not agree to the term sheet--and if the [participating tobacco manufacturers] continue to withhold going forward, next year there could be a decline in the overall MSA payment,” said analysts at S&P.

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