California draws on reserves for tobacco debt payments

Mon Dec 3, 2012 5:28pm EST
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SAN FRANCISCO Dec 3 (Reuters) - California officials have tapped reserves for payments on two series of state tobacco bonds due to insufficient tobacco settlement revenue, according to notices filed with Municipal Securities Rulemaking Board on Monday.

The draws indicate how municipal bond issuers that sold debt backed by settlement revenue must contend with the effects of declining sales of tobacco products.

Moody's Investors Service takes the decline so seriously that it said in July a majority of tobacco bonds sold by U.S. states, counties and cities will default if cigarette consumption keeps falling at a 3 percent to 4 percent annual pace.

States, counties and cities have sold nearly $40 billion of bonds backed by the more than $200 billion in payments that U.S. cigarette makers agreed to make to them over time.

Settlement payments may vary from year to year as they are mainly based the number of cigarettes sold.

The payments follow a Master Settlement Agreement in 1998 to settle lawsuits launched by states to recover medical costs associated with smoking-related diseases.

"Most states haven't come close to what they originally thought they would get," said Dick Larkin, director of credit analysis at municipal bond broker-dealer HJ Sims.

Larkin added that the reserve draws in California do not indicate a default brewing. But he said the move should not be a surprise: "Once they got the (settlement) payment in April everybody knew it wasn't enough."

The 46 states that participated in the 1998 agreement shared $6.15 billion in payments in April, up from $6.03 billion in April 2011, according to the National Association of Attorneys General.   Continued...