States are estimated to receive about 1% more in annual payments from tobacco companies this year than in 2011, offering more money will be available to return billions of dollars of municipal bonds, tobacco payments.
It is expected that the state will receive about $ 6.1 billion from tobacco companies this year, according to figures released by the National Association of Attorneys General. Last year they collected about $ 6.03 billion. Payments are made according to the 1998 settlement, the States agreed health-related claims against tobacco manufacturers.
Tobacco companies should make their annual payments on April 15, but will make their April 16 this year because April 15 falls on a Sunday. The amount actually collected may be somewhat different if some companies are unable to make payments in the past year, the default is 20 million dollars. Payments are based on U.S. consumption of cigarettes in the previous calendar year.
Cigarette consumption has declined faster than expected over the past few years, forcing Virginia, Ohio and California, to use the reserves last year to pay the investors who own tobacco bonds. It was not clear whether the slight tick in payments will be sufficient to capture the state of their reserves again.
Cigarette consumption fell by 3.5% in 2011 after declining by 3.8% in 2010 and 8.6% in 2009, according to industry research group Department of Science Associates. The companies that signed the 1998 agreement may hold some payments if they lose market share to other producers who have not yet signed. Companies are not required to hold a so-called “non-participating manufacturer adjustment,” but last year the three original signatories - Reynolds American Inc (RAI), Lorillard Inc (LO) and Altria Group Inc (MO) - continued, the money from the state.
Although the fee for that year was founded in 2011, cigarette consumption, not participating manufacturer adjustment of the three original signatories based on 2009 sales. Adjusting this year is about $ 780 million less than the approximately $ 825 million in the previous year, according to the Attorney General. Even if the consumption of cigarettes continues to decline, the less this year, the adjustment helps states with a small tick in the tobacco payments. Approximately $ 6.1 billion in tobacco payments is estimated this year includes setting.
The market share of signatories continues to grow. Their combined share amounted to 84.71% in 2011, the most since 2007, when the figure was 84.77%, in accordance with the Attorney General. The market share for companies that have not signed an agreement in 1998 was 5.65%, the lowest since at least 2003, according to the Attorney General.
Vikram Rai, a credit strategist at Citi, said that a small tick in the actual payments this year will be a plus for Bond brand of cigaretes, despite the short-date bonds could rally more. Furthermore, if the original signatories to continue to recover market share from companies that have not signed an agreement to adjustments in the future should be lower. Cautious investors have traditionally avoided because of the risk of tobacco bonds, while others were brought to their high yields. Tobacco bonds are generally more volatile than other municipal bonds, as well as offer juicy returns, although they also have the potential to outperform.
Later take into account the relationship of tobacco consumption is declining in more recent years, to turn to a more risk-averse investors. For example, Ohio, listed in a study in 2007 bond prospectus, which is estimated at 1.8% per annum reduction in cigarette consumption.
Forty-six states signed the 1998 agreement, and there is about $ 30 billion of tobacco bonds in circulation.