The controversy over an Illinois state judge’s ruling involving Altria Group (Philip Morris) has spawned some strange bedfellows, and their common interests are a good sign for tobacco settlement bondholders.
Many state governments, who were once the tobacco industry’s fiercest opponents, are trying to keep the country’s biggest cigarette maker on solid ground as it threatens to file bankruptcy over the requirement that it post a $12 billion bond in order to appeal an adverse decision in a class-action lawsuit.
The states want to ensure that money promised them under the Master Settlement Agreement (MSA) with the tobacco industry isn’t jeopardized. In an effort to speed up their access to the MSA funds, many states sold bonds backed by future payments from the tobacco firms.
California, New York and Illinois may be forced to shelve plans to issue billions of dollars of tobacco bonds because of unfriendly market conditions and the threat of downgrades by rating agencies.
States depend on the money
The states are concerned that an interruption of payments from Philip Morris will hamper their efforts to plug their budget deficits, projected to total more than $100 billion nationwide. In fact, many state attorneys general, plan to intervene in the Illinois case, with the goal of preserving the MSA and their ability to issue new bonds.
Although the rating agencies originally accounted for the contingency of further adverse legal awards, the $12 billion cash bond required by the Illinois court poses an immediate financial flexibility problem for Philip Morris.
Washington State Attorney General, Christine Gregoire, said that the size of the bond “could create a chilling effect on the ability of the defendant to appeal. And more importantly, it could deal a significant unnecessary financial blow to the states.”
Ironically, one day before the court ruling, Illinois State Senate President, Emil Jones, proposed selling $2.1 billion of tobacco bonds to cover the costs of the state’s Medicaid program. Currently, at least four other states have proposals for tobacco bonds pending before state legislatures.
The states’ dependency on the funds is obviously not lost on Philip Morris. The company is due to pay $2.5 billion, in accordance with the MSA, by April 15, but is claiming that it may not be able to do so because of the Illinois bond.
Based on Philip Morris’ threat of not making their April payment, a number of state attorneys general are preparing to enter the dispute. Vermont Attorney General, William Sorrel, said the states would most likely file a formal motion to intervene in the Illinois case. They will attempt to urge the court to impose a lesser bond to protect their constituents’ financial interests.
Common interest
Bondholders should be encouraged by the common financial interests of tobacco companies and the states. Since the MSA was reached in 1998 between the cigarette makers and 46 states, over $21.6 billion has been paid to the states, with another $5 billion due this year.
Illinois legislators are currently considering a law that would limit the amount of money Philip Morris would have to post as a bond in order to appeal.
Philip Morris has hired Jim Thompson, the former Illinois governor, to lobby for the company. Illinois itself is due $150 million of the April 15 payment, which according to Thompson is earmarked for health care programs for the elderly.
W.A. Drew Edmondson, Attorney General of Oklahoma, told The Wall Street Journal, “We are very concerned that the amount of the appeal bond will adversely affect budgets in 46 states. There is no benefit to public health by putting Philip Morris in this financial position. They’re going to sell just as many cigarettes even if they’re in receivership.”
The government profits more than anyone else from the sale of a pack of cigarettes – far more, in fact, than even the manufacturers. And the tobacco settlement bonds have been a boon to state governments. With 46 states counting on Altria’s continued payments, bondholders should feel comfortable with the company they’re keeping.