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Worst-Performing Tobacco Debt Set to Trail in 2012: Muni Credit 

Tobacco bonds, the worst part of the municipal market, may extend their underperformance into a third year as cigarette makers withhold payments backing more than $100 billion of debt.

California and Ohio used reserves for Dec. 1 payments on bonds paid by proceeds from a 1998 deal in which cigarette makers compensate 46 states for the harm of smoking. Producers, including Reynolds American Inc. and Lorillard Inc., began withholding some money in 2003 in a dispute with states over market share lost to companies not part of the accord.

A projected 4 percent annual decline in cigarette sales will also reduce payments from manufacturers, prompting Moody's Investors Service to lower $3.5 billion of tobacco debt to below investment grade in September.

"The attractiveness of this sector is obviously going down," Lyle Fitterer, managing director of Wells Capital Management, based in Menomonee Falls, Wisconsin, said in a telephone interview. Fitterer helps oversee $26 billion of municipals, including about $200 million of tobacco debt.

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Ohio, Virginia Tap Reserves for Dec. 1 Tobacco Bond Payments  

As expected, Ohio and Virginia were both forced to dip into reserve funds to cover their Dec. 1 interest payments on more than $7.2 billion of tobacco bonds.

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House DFLers: Enough with the tobacco bonds already! 

Enough with borrowing against the tobacco money, say a few Minnesota DFLers. Bill Salisbury at the PiPress writes: “House Democrats on Monday urged Republican lawmakers and Gov. Mark Dayton to quit borrowing from future tobacco company payments to plug holes in the state budget. Last week, the state borrowed $640 million by selling tobacco bonds to help balance the current state budget. The state will pay $576 million in interest over the 20-year life of the bonds with proceeds from a 1998 tobacco settlement. With another budget deficit likely next year, House Taxes Committee Chair Greg Davids, R-Preston, said last week that lawmakers probably will look at more tobacco bonds to fix the state's money problems. ‘We reject any idea of using appropriation bonds to solve any more state budget deficits,’ Rep. Ryan Winkler, DFL-Golden Valley, said at a Capitol news conference. He and other DFLers said the money spent on interest could better be used for education, health care and other critical services.” Possibly. But has anyone asked the “job creators” at the banks how they feel about borrowing?

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Minn. House Democrats urge no more tobacco bonds 

The expectation of another Minnesota budget deficit has legislators girding for another difficult debate.

And House Democrats threw down one marker Monday: No more borrowing against the state's multibillion dollar tobacco settlement.

A state authority recently sold more than $750 million in bonds using the tobacco settlement as the repayment stream. It's for a budget patch seen as temporary. But the 20-year loan will require end up costing $1.2 billion.

Neither Democratic Gov. Mark Dayton nor majority legislative Republicans have ruled out using the mechanism to address future shortfalls.

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STURDEVANT: Tobacco bonds: A high-priced revenue alternative  

To put an additional $640 million into the 2012-13 state budget, bonds were issued Thursday that will cost a total of $1.2 billion over their 20-year lifetimes.

Lawmakers were warned that it would be so. But some may not have believed it until last week's $757 million bond sale by the new "Tobacco Securitization Authority" was final.

Of that amount, $117 million will be diverted for "funding of a debt service reserve fund, capitalized interest, and costs of issuance," the bond sale announcement said.

But the expected interest costs over 20 years will be an additional $459 million. . . .

What should concern Minnesotans is that this one-time gimmick raids future state revenues to pay for government today.

It all but assures another budget deficit for the 2013 Legislature to address with reduced services, higher taxes -- or more borrowing.

House taxes chair Greg Davids, R-Preston, said earlier this month that borrowing against future revenues is "something I'm sure everyone will be looking at again."

Did I just hear somebody humming "California, Here We Come"?

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COLLINS: Minnesota sells the good china 

Anytime you sell future earnings, you're going to lose in the long run. The companies that bought the "bonds" have agreed to give the state a pile of cash now, in exchange for the state giving them two piles of cash later. The state will apply $640 million of the sale to erasing part of the state's budget deficit. For that, it will pay over $1.2 billion over 20 years, MPR's Tom Scheck reports.

Almost from the time the tobacco case was settled, politicians have fought over how the money would be used. . . . ate got about $169 million in 2011.

There were also six one-time payments between September 1998 and January 2003. They were to go to two endowment funds and one legislative account. They funded the Tobacco Use Prevention and Local Public Health Endowment, the Medical Education Endowment, and an Academic Health Center Account within the Medical Education Endowment, according to the House Research Department.

Over that time, adult smoking in Minnesota dropped from about 22 percent immediately after the tobacco settlement, to about 17% in 2007.

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• Minnesota finalizes sale of $757 million in bonds using tobacco settlement payments as backup  

Minnesota finance officials said Thursday they've completed the sale of $757 million in bonds using the state's future tobacco lawsuit settlement dollars as the repayment stream -- a move that comes with substantial costs.

The sale finalized this week will generate a one-time infusion to temporarily close a state budget gap. But principal and interest costs will top $1.2 billion over the next two decades. It will leave a $60 million to $80 million annual hole in the budget for years to come.

All told, the state will give up $1.21 billion in settlement payments tied to a 1998 court case with cigarette makers. Interest on the new debt approaches $460 million.

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• Twelve States Won’t Have to Refund Tobacco Money  

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.

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• Minn. burns future tobacco cash for budget fix now  

Minnesota's government is about to give up $1.1 billion in future payments from tobacco companies so it can get about half as much money now for a temporary budget fix.

A new state authority expects to finalize a bond sale late next week that leverages a portion of Minnesota's 1998 tobacco lawsuit settlement. The sale will free up $640 million to patch a near-term budget hole, but the payouts to bondholders, with interest, will add to the budget woes the state is projected to have for years to come.

Minnesota isn't the first state to take such a step. Lawmakers could even go back to the remaining tobacco money if another budget deficit surfaces in a new economic forecast due Dec. 1. . . .

Under the so-called tobacco securitization bond, the state gives up rights to a big chunk of tobacco payments through 2031. Last year, the state received about $170 million.

The overall cost to the state won't be known until the sale is final because interest rates could still fluctuate. But officials are projecting $1.2 billion in total debt costs, all but about $100 million coming from the diverted tobacco payments. The rest is from the new reserve account.

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BAT Goes Long With 10-Year Bonds as Returns Accelerate: Corporate Finance  

British American Tobacco Plc (BATS), the maker of Lucky Strike and Pall Mall cigarettes, raised 600 million euros ($828 million) in its first bond sale since June 2010 by appealing to growing demand for longer-term debt.

The 10-year notes were priced yesterday to yield 123 basis points more than the benchmark swap rate, after initially being offered at a spread of as much as 135 basis points. European company debt due in a decade or longer has returned 6.4 percent this year, compared with 4.1 percent for all maturities, according to Bank of America Merrill Lynch’s EMU Corporates, Non-Financial index data.

Investors said they were drawn to the bonds of the London- based company on evidence that it’s weathering an economic slowdown, with revenue increasing 7 percent in the first nine months of the year. The sale came on the same day that the European Financial Stability Facility delayed its 3 billion-euro offering.

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Minnesota Tobacco Bond May Defy Underperformers: Muni Credit  

A dispute dating to 2003 hinges on whether tobacco companies that signed the 1998 agreement have lost market share to producers that didn’t join the deal.

A dispute dating to 2003 hinges on whether tobacco companies that signed the 1998 agreement have lost market share to producers that didn’t join the deal. Photographer: Chris Goodney/Bloomberg

Minnesota’s first sale of tobacco bonds may escape concerns about declining industry shipments and legal disputes that have caused the securities to underperform municipal and U.S. Treasury debt this year.

Democratic Governor Mark Dayton plans to use $640 million of the proceeds to help balance his two-year budget. Legislators authorized the sale in a deal to end a 20-day government shutdown, the longest in a U.S. state since at least 2002, according to the National Conference of State Legislatures.

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AUDIO: Questions swirl around details of tobacco bond sales 

Minnesota finance officials are preparing to sell the tobacco bonds that were part of the state budget solution, but questions remain about the details of the sale, the amount of money the bonds will raise and even the legality of one version of the bonds.

The bonds represent $640 million of the agreement that erased Minnesota's $5 billion deficit and ended the state government shutdown.

Many key people involved in the tobacco bond sale are reluctant to discuss it.

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Minnesota Issues RFP for Tobacco Deal ($$) 

CHICAGO - Underwriters interested in participating in the financing team for Minnesota's proposed tobacco bond issues have until Aug. 24 to submit their proposals for review.

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2nd UPDATE: Lorillard Tobacco Plans Benchmark US Debt Offering ($$) 

Lorillard Tobacco Co. of Greensboro, N.C., is planning to sell a $750 million two-part bond offering in the U.S. debt market Monday, according to a person familiar with the deal.

The deal includes a $500 million five-year tranche and a $250 million 30-year tranche. The company added the 30-year tranche at midday after originally disclosing only the five-year tranche Monday morning.

Both tranches launched at the narrow end of price guidance, indicating strong demand, with the five-year piece at 225 basis points over Treasurys and the 30-year piece at 300 basis points over Treasurys.

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Fitch Completes U.S. Tobacco Portfolio Review 

Fitch Ratings has completed its review of its tobacco portfolio, incorporating the amount of Master Settlement Agreement (MSA) payments received by each trust in 2011, and taken various rating actions. For 2011, the aggregate MSA payment was 5% lower than the amount in 2010. This drop was driven by a large decline in tobacco consumption as well as an increase in the disputed payments not being released to the states. As a result, downgrades were taken on a number of turbo and capital appreciation bonds (CABs) which are typically more leveraged and are more negatively affected by the MSA payment decline. No serial bonds were downgraded.

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