Twelve States Won’t Have to Refund Tobacco Money

(Corrects Philip Morris International to Philip Morris USA in sixth paragraph of article published Nov. 7.)

Twelve U.S. states and four territories won’t have to refund money from a 1998 settlement with tobacco companies after the cigarette makers released them from litigation over the enforcement of the deal, said Richard Larkin, director of credit analysis at Herbert J. Sims & Co.

More than 30 states and localities that issued bonds backed by settlement payments are at risk of losing $1.1 billion if arbitrators decide they didn’t diligently enforce the agreement, said Larkin, who follows tobacco bonds for Sims & Co., which is based in Iselin, New Jersey.

New Jersey, South Dakota, the Virgin Islands, Guam and Wisconsin are among states and territories that diligently enforced the agreement and won’t have to refund money, according to Larkin.

“The remaining states and local issuers that have outstanding tobacco bonds, however, could see significant weakening of cash flow in 2012,” Larkin said in a research note. Those states and localities include California, Ohio and New York City, Larkin said.

Tobacco companies agreed in 1998 to reimburse states for treating smoking-related illnesses. States and local governments have about $106 billion of outstanding bonds backed by those payments, according to data compiled by Bloomberg.

Seeking Refunds

Altria Group Inc. (MO)’s Philip Morris USA unit, Reynolds American Inc. (RAI) and Lorillard Inc. (LO) are seeking refunds from states and localities that participated in the agreement on the grounds that they didn’t diligently enforce statues related to other companies that weren’t part of the settlement, causing the participating companies to lose market share.

The decision by the tobacco companies to release the states from arbitration applies only to settlement payments from 2003, Larkin said. It doesn’t guarantee that they are immune for the years 2004 through 2010, he said.

“The winding down of this initial arbitration for 2003, however, may speed up future arbitrations for the remaining years,” Larkin said. “That would remove a great deal of uncertainty over tobacco-bond cash flow, which has existed since the first firms began disputing their payments in March 2005.”

Arbitration about the disputed payments has been going on for more than two years, Larkin said in an interview.

To contact the reporter on this story: Martin Z. Braun in New York at mbraun6@bloomberg.net.

To contact the editor responsible for this story: Mark Tannenbaum at mtannen@bloomberg.net.

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