New York Tobacco Debt Gets Boost From Arbitrator Ruling

Bonds issued by New York local governments and payable by revenue from a national settlement with major tobacco companies will get a boost from an arbitration panel’s decision to order the companies to pay the state more than $92 million, said Richard Larkin, director of credit analysis at Herbert J. Sims & Co.

New York Attorney General Eric Schneiderman said yesterday that arbitrators threw out an $800 million claim against the state by Philip Morris USA, Lorillard Inc. and Reynolds American Inc. Instead, the panel ordered them to pay $92 million they withheld from the state from their 2003 annual payment.

“For issuers like Nassau County, this decision will definitely push back the date of a possible default for a good number of years, and may actually allow local issuers to pay 100% of their securitized tobacco debt in full and on time,” Larkin said in an e-mail. Herbert J. Sims is based in Iselin, New Jersey.

Eight other states won decisions yesterday over the disputed payments, while six lost, Larkin said. Besides New York, three of the winning states -- Ohio, Illinois, and Iowa -- have issued tobacco bonds, he said. None of the states that lost issued them, he said.

Prices on Ohio tobacco bonds maturing in 2034 rose in trading today to about 73 cents on the dollar from 71.5 cents yesterday, according to data compiled by Bloomberg. The prices are based on trades ranging from $2.4 million to $5 million.

Health Costs

The 46-state tobacco settlement in 1998 required the companies to make annual payments to resolve their liability in health-care cost litigation. Some states and municipalities borrowed against the payments, which are based on cigarette shipments. Most of the tobacco bonds graded by rating companies 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.

High-yield tobacco bonds have lost 15.4 percent this year, compared with a 5 percent drop for the broader municipal-bond market, according to Barclays Plc data.

Indian Sales

In New York, the disagreement centered on the state’s policy of not taxing cigarette sales on Indian reservations. The state didn’t collect payments from companies that didn’t join the national settlement on reservation sales.

“This precedent-setting decision is expected to protect the state from many billions of dollars in future claims,” Schneiderman said in a release. “In rejecting the tobacco companies’ claims, the panel fully recognized New York’s long-standing policy.”

While the arbitrators ruled in favor of Ohio, they said that its efforts to enforce the settlement “had mixed results,” according to the arbitration panel’s finding.

One of the state’s weakest areas was gathering reliable data on cigarette sales by companies that didn’t participate in the 1998 settlement.

The six states that lost their arbitration cases will refund money to Philip Morris, Lorillard and Reynolds American, according to news releases from the companies. Reynolds said it was entitled to $266 million, and Philip Morris said it would get $145 million. The money will be deducted from the annual payments the companies make to states in April.

Investors who own tobacco bonds are still at risk of not being repaid if anti-smoking laws and cigarette tax increases cause sales to drop more than 5 percent annually, Larkin said.

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