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Tobacco payments in perpetuity
Q
Under the Master Settlement Agreement, are payments by the tobacco companies to the states required to continue in perpetuity or do they sunset after a certain year? If they continue in perpetuity, will there ever be a default on tobacco bonds, or just a delay in repayment?
A
James A. Klotz responds:
Payments by the tobacco companies to the states do continue in perpetuity. However, it is not clear whether bonds, upon final maturity, would still continue to pay if there was a shortfall in prior years. Discussions with Standard & Poor’s and review of certain tobacco bond transactions suggest this possibility.
Many transactions do not specify whether the issuer’s responsibility to pay past-due principal and interest would be honored once the final maturity date of the transaction has been reached. Some transactions do provide for this situation (e.g. Rhode Island), but many do not. S&P has consulted legal counsel on this issue and has yet to receive a definitive answer.
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