Tobacco settlement bonds are still an excellent investment, despite increasing hurdles for tobacco firms.
Unlike corporate bonds issued directly by tobacco businesses, debt service payments on tobacco settlement bonds are based on the overall credit strength of the tobacco sector as well as the smokers who continue to use their products. Tobacco settlement bonds, we believe, will continue to be superior investments as long as the Master Settlement Agreement (MSA) is in force. This is why.
Tobacco companies have been and continue to be the target of negative press. In a class action suit against Philip Morris, a judge in Madison County, Illinois recently awarded $10.1 billion to smokers. Credit agencies placed Philip Morris’ parent company, Altria Group, on negative credit watch as a result of a unique Illinois legislation that compels Philip Morris to pay a $12 billion bond in order to appeal this verdict.
Tobacco bonds have traditionally been assessed based on each agency’s assessment of the tobacco industry’s overall credit quality, as well as specific collateral difficulties that each financing presents. Because Philip Morris accounts for over half of all tobacco sales in the United States, its fortunes are a barometer for the industry as a whole. As a result, a change in PM’s ratings could result in unjustified rating changes for tobacco securitization bonds.
Minimal Effect on Payment of Tobacco Settlement Bonds
We believe that the recent rating agency moves will have little impact on tobacco bond principle and interest payments. The reason for this is that tobacco settlement bonds are not Philip Morris or any other cigarette company’s obligations. They were issued by special purpose corporations set up by each state in order to securitize its tobacco settlement payment stream. In 1998, the tobacco industry and 46 states and four territories signed the Master Settlement Agreement (MSA), which provided for $206 billion in payments to the states over a 25-year period as recompense for health and other associated expenditures.
Cigarette industry bankruptcies, market movements among tobacco corporations, and a drop in smoking are all contingencies built into the financings that have securitized those settlements. Bond issues are typically assigned ratings that reflect the borrower’s business prospects, financial strength, and debt burden. Ratings are frequently adjusted as these criteria change.
In this situation, any change in Philip Morris’ rating will reflect the rating agencies’ assessment of the company’s capacity to service its direct debt. When it comes to tobacco settlement debt, the situation is a little different. According to rating agency legal advisors, Philip Morris’ MSA pledge is seen as a “executive contract,” and as such, would be highly unlikely to be disrupted even in the unlikely case of bankruptcy. This would render the MSA null and void, reopening cases filed by all 50 states and territories that are parties to the agreement.
The likelihood of payment on tobacco settlement bonds is exclusively dependent on the payment stream established under the MSA to the states. Each tobacco settlement bond financing was structured based on “worst case” scenarios, expecting a lower payment stream than predicted, and was designed to cover debt payments on schedule. Tobacco settlement bond issuers have committed funds from MSA payments in excess of the amount required to meet debt service requirements, allowing them to survive a number of disastrous eventualities, including the bankruptcy of a large tobacco business, through a process known as “over collateralization.”
The Bottom Line
Because of Philip Morris’ dominant market position, its ratings are a proxy for ratings on the cigarette industry. Cigarette settlement bonds are paid from the MSA settlement stream to each state and are not a direct liability of tobacco businesses. There is a substantial deterrent for tobacco businesses to leave the MSA during a bankruptcy, because the resulting rush of new litigation would only serve to further reduce their financial flexibility. Finally, tobacco settlement bond ratings are based on the cigarette firms’ ratings, not the MSA revenue stream’s strength, as we believe they should be. There is no other bond that we are aware of where the ratings are as disjointed from the underlying security as this one.
Standard & Poor’s, one of the rating agencies, is likely to downgrade Philip Morris’ parent firm Altria Group in the near future as a result of the $12 billion bond that Philip Morris may be compelled to issue. Tobacco settlement bonds may also be reduced as a result of this action. Nonetheless, we believe that a downgrade would be unnecessary as long as Philip Morris is a member of the MSA and that bondholders will continue to be paid.
What is the purpose of tobacco bonds?
A tobacco bond is a sort of US bond issued by a state to raise revenue quickly, backed by a successful lawsuit against a tobacco firm. A typical tobacco bond has a term of 30 years or fewer and pays annual interest.
Tobacco bonds accounted for $94 billion of the $3.7 trillion municipal bond market in 2014. They split a revenue stream from the Tobacco Master Settlement Agreement, a 1998 nationwide settlement in which Philip Morris, Lorillard, and Reynolds American agreed to make annual payments to states in perpetuity to settle liabilities for smoking-related health-care expenditures. Alaska, California, Iowa, Michigan, New Jersey, New York, Ohio, Rhode Island, West Virginia, Washington, D.C., Puerto Rico, and Guam, as well as Washington, D.C., Puerto Rico, and Guam, borrowed against the money based on cigarette shipments.
Tobacco settlement payments are what they’re called.
In exchange, the firms agreed to limit or eliminate certain tobacco marketing activities, as well as pay states in perpetuity a variety of annual payments to cover some of the medical costs associated with caring for people who suffer from smoking-related illnesses. The money also goes to a new anti-smoking advocacy organisation called the Truth Initiative, which is in charge of campaigns like Truth and keeps a public archive of court documents.
So, what exactly are bonded cigarettes?
Most states need cigarette tax surety bonds as a requirement of selling cigarettes and other tobacco goods. The bond ensures that you will pay your local government agencies the necessary taxes. The Alcohol and Tobacco Tax and Trade Bureau requires tobacco merchants in all states to post federal bonds. On your contract with the surety company, the government agency requesting the bond must be mentioned as the obligee.
What is tobacco securitization, and how does it work?
WHAT IS THE DIFFERENCE BETWEEN A SECURITIZED AND UNSECURITIZED BOND? A securitized bond, unlike other bonds that are backed by revenues or taxes, is backed by a stream of future payments to the government body. A tobacco securitization bond is backed by tobacco settlement payments and is based on cigarette sales from participating manufacturers.
In India, how much does a pack of cigarettes cost?
Cigarettes will now burn a hole in your pocket, as FMCG giant ITC raised its cigarette pricing just days after Finance Minister Nirmala Sitharaman announced a hike in excise duty on tobacco and cigarettes in her Budget. Following the raise in the National Calamity Contingency Duty (NCCD) announced in the Union Budget this year, market leader ITC increased cigarette prices by 10-20% across several of its brands in all of its markets.
Taxes on cigarettes grow as NCCD rises. Manufacturers can either pass the cost on to the customer or absorb it.
“A number of brands’ prices have been updated,” an ITC spokeswoman said, adding that the revisions were made across different bands for different cigarette sizes.
According to Business Standard sources, the price of American Club Cool Fresh Taste increased by 10%, from Rs 200 to Rs 220 for a pack of 20 cigarettes, while Navy Cut Filter increased by roughly 16%, to Rs 80 for a pack of 10 sticks. Flake Filter has increased in price by 14% to Rs 80, while Flake Special Filter, Flake Blue Special Filter, and Wave Cool Mint have all increased by 20%.
What is the 1998 tobacco settlement in the United States?
In 1998, the Master Settlement Agreement (MSA) was struck by 52 state and territory attorneys general with the four major tobacco corporations in the United States to settle dozens of state lawsuits seeking billions of dollars in health-care expenditures associated with treating smoking-related ailments.
More than 45 cigarette corporations eventually reached an agreement with the Settling States under the MSA. Despite the fact that Florida, Minnesota, Mississippi, and Texas are not signatories to the MSA, they each have their own tobacco settlements that predate the MSA.
The MSA’s goal is to eliminate smoking in the United States, particularly among adolescents, by implementing the following strategies:
- Increasing the price of cigarettes by placing payment obligations on tobacco firms that are members of the MSA.
- Tobacco businesses are prohibited from targeting kids in their tobacco product advertising, promotion, or marketing.
- Tobacco product cartoons are not allowed to be used in advertising, marketing, packaging, or labeling.
- Tobacco firms are not allowed to distribute items with their brand names on it.
- Payments for tobacco product promotion in media like as movies, television shows, theater, music, and video games are prohibited.
- Tobacco brand sponsorship of events or team sports with a large youth audience is prohibited.
- Providing funds to the Settling States for the purpose of funding smoking control programs.
- Creating and supporting the Truth Initiative, which is “committed to developing a culture where all young people and adults reject tobacco.”
What happened to the tobacco settlement funds?
In 1998, a landmark judicial settlement between 46 states and the big tobacco firms as well as individual settlements with four other states forced the businesses to pay more than $246 billion in compensation for tobacco-related health-care expenditures over time.
That money continues to flow in. The states will receive $27.2 billion from the 1998 tobacco settlement and cigarette taxes this year (fiscal year 2020). However, they will spend less than 3% of the entire cash recommended by the CDC $739.7 million on programs to prevent children from smoking tobacco and to assist smokers in quitting less than a quarter (22.4%) of the total spending.
What were the tobacco firms’ lies?
For decades, Big Tobacco has been lying about the dangers of cigarettes and influencing the American public. The tobacco business was judged to have broken civil racketeering rules in 2006, and as a result, was obliged to tell the truth about cigarettes’ lethal and destructive effects.
Big Tobacco has finally been obliged to begin issuing advertisements, or “corrective statements,” stating these truths, after fighting and delaying the court’s ruling for 11 years. The ads, which will run in around 50 newspapers and on major TV networks across the country, will detail the dangers of cigarette use.
- Cigarette manufacturers purposefully manufactured cigarettes to contain enough nicotine to cause and maintain addiction.
- Every year, smoking kills more people than murder, AIDS, suicide, drugs, vehicle accidents, and alcohol combined.
- Lights, low tar, ultra lights, and natural cigarettes all cause cancer, lung disease, heart attacks, and untimely death. There is no such thing as a safe cigarette.
The federal courts declared Altria, R.J. Reynolds Tobacco, Lorillard, and Philip Morris USA to be in violation of civil racketeering (RICO) laws, based on a complaint filed by the Justice Department in 1999 and a landmark ruling delivered by U.S. District Judge Gladys Kessler in August 2006. The firms systematically misled the American people for decades, according to the courts, by lying about the health impacts of smoking and their marketing to children, among other things.
The tobacco firms “marketed and sold their dangerous products with passion, with deception, with a single-minded emphasis on their financial success, and without consideration for the human tragedy or social costs that success exacted,” Judge Kessler wrote in her 1,683-page judgment. “The evidence in this case clearly demonstrates that Defendants have not ceased engaging in unlawful activities,” Judge Kessler said.
Yet, in order to minimize the impact of the verdict, Big Tobacco purposely delayed compliance for nearly a decade, even battling to have the phrase “Here is the truth” deleted from the commercials.
The compulsory media buy, which calls for ads to be published in 50 newspapers over four months and on major networks during primetime for 52 weeks, failed to account for the inevitable surge in popularity of digital platforms for media consumption. As a result, many young people who should be seeing the ads will not. Since the lawsuit began in the late 1990s, an entire generation of young people has been born and raised in a media landscape that has altered dramatically. The majority of young people do not watch prime time television or read newspapers any longer.
Justice is denied when it is delayed. Approximately five million people have died from tobacco-related sickness in the years since Big Tobacco delayed the correction remarks, and the number of persons dying each day from tobacco-related diseases has increased from 1,200 to 1,300. Despite tremendous success in lowering smoking, the United States’ biggest cause of preventable death and disease is still tobacco use.
“Corrective action is required, not corrective statements,” Koval stated. “If tobacco companies truly wanted to make a difference, they would stop opposing tobacco control measures that have been shown to reduce consumption, such as graphic warnings on packaging, menthol bans, and higher tobacco taxes, and, even better, they would stop selling a product that kills half of its users.”