Muni Tobacco Debt of $20.5 Billion Put on Review by Moody’s

More than $20 billion of municipal bonds backed by funds from tobacco companies were placed on review by Moody’s Investors Service, which said an agreement over disputed payments would reduce cash flow to the debt.

Philip Morris USA, Lorillard Inc. and Reynolds American Inc. said last month they would release to 17 states, the District of Columbia and Puerto Rico their portions of more than $4 billion in payments held back from a 1998 health-care settlement. In exchange for the release of funds, the companies would get credit against future payments.

“The joining states will receive only 54 percent of the approximately $4 billion share under dispute, significantly less than the 100 percent that we expected,” Moody’s said in a release yesterday.

The 46-state accord in 1998 required the companies to pay $206 billion to resolve their liability in health-care cost litigation. Some states borrowed against the payments, which are based on cigarette shipments. Most of the tobacco bonds graded by Moody’s are ranked below investment grade.

A dispute between the tobacco makers and states later arose over more than $7 billion due under the deal for the years 2003 to 2012, stemming from claims that market-share erosion reduced the companies’ obligations.

By establishing a formula, the December agreement suggests that future payment disputes and settlements at less than 100 percent may continue for the term of the bonds, Moody’s said. The accord must be approved by an arbitration panel.

The December plan also indirectly affects tobacco bonds from states that join the pact because it sets a precedent that their recoveries of future disputed amounts can be less than 100 percent, Moody’s said.

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