Lorillard’s pending acquisition of Reynolds American shrinks the number of original participating manufacturers (OPMs) in the Tobacco Master Settlement Agreement to 2 from 3.
But payment volume will probably stay the same.
Lorillard and Reynolds American combined would see their share of tobacco settlement payments to tobacco bonds increase to 33%. The acquisition would also concentrate the share of payments made by OPMs to about 90%, according to a Moody’s Investors Service report published this week.
Although the increased share of OPM payments will heighten payee concentration risk in bonds, it's unlikely to result in a decline in payments, according to Kym Arnone, a managing director at Barclays who participated in a roundtable discussion on tobacco bonds hosted by Standard & Poor’s this week.
“Geographically, the Reynolds American and Lorillard brands are also viewed to be complementary with little overlap,” said Arnone. “While the merger does concentrate more OPM market share for the top two manufacturers — arguably as a result of the merger and synergies — the combined company should be a stronger entity, which is a credit positive for the MSA.”
The merger would also create a solid number three payee, Imperial Tobacco, which joined the MSA as a subsequent participating manufacturer. As part of the merger transaction, Imperial has agreed to purchase the Kool, Salem, Winston, and blu eCig brands. The tobacco company has also agreed to assume the OPM payment obligations of these brands.
“Imperial is signing on to the settlements entered into by the OPMs, so it should be on the same footing as Philip Morris and Reynolds American,” said Rich Akulich, managing director, Mesirow Financial Inc. at the S&P roundtable event.