NEW YORK - Decreasing sales of cigarettes coupled with arguments over how much tobacco companies should pay states could cause more than $12 billion of defaults on related bonds from Virginia, Ohio, New Jersey, California and New York City, Bloomberg News reports.
Issued in 2006 and 2007, those bonds were backed only by tobacco-company payments, with defaults potentially "occurring as early as 2030," according a report by Richard Larkin, a senior vice-president at Herbert J. Sims & Co. Tobacco companies€™ payments owed states under the 1997 tobacco settlement plummeted 16 percent in April, according to the National Association of Attorneys General.
That drop happened due to a 9 percent decrease in cigarette sales in 2009, more than double the 4 percent decline predicted in some bond sales, said Larkin.
Various state and federal tax hikes reduced cigarette sales more than anticipated when the states issued the bonds. The average local hike jumped threefold since 2000, from 41 cents per pack to $1.35 per pack in February, according to a Standard & Poor€™s report. From 2000 to 2009, U.S. cigarettes sales by major tobacco companies slid around 25 percent to 16.2 billion packs of 20, the company reported.
Falling cigarette sales means states aren€™t getting as much money and are not able to pay on the tobacco securities as quickly as expected when they were sold. For example, Ohio estimated its repayment of its bonds would be by 2017. "I estimate those bonds won€™t be repaid until 2024, and then only by using reserve funds," said Larkin.
Also at issue is an arbitration hearing in Chicago that might give tobacco companies a $1.1 billion refund of payments made to states. The companies want the refund because they say the states have not been aggressive enough in collecting payments from smaller tobacco companies that were not part of the original settlement.