Payments made by tobacco companies in 2012 under the master settlement agreement (MSA) largely met official estimates, it was announced Monday.
As estimates for the amount the tobacco companies pay the 46 states that signed the 1998 Tobacco MSA typically stray widely from the actual payment figure, a small deviation between the numbers this year should have a calming effect on the estimated $48 billion market for tobacco bonds, some in the industry said.
The three largest tobacco firms expect to pay up to approximately $6.5 billion in 2012, said representatives from the three firms, Altria Group’s Philip Morris USA, Reynolds American, and Lorillard. The figure fell largely in line with what the firms paid in 2011, varying about $100 million in either direction at two of the cigarette manufacturers.
The number that the National Association of Attorneys General (NAAG) estimated last week stood at about $6.9 billion.
In addition, the amounts the three tobacco companies withhold from the states in an escrow account for allegedly overpaying in 2005 for 2003 sales added up to $773 million. By comparison, the NAAG “dispute” estimate landed at $672 million.
Tobacco bond investors should take some comfort in the payment amounts, said Peter Bianchini, senior municipal strategist for institutional sales and trading at Mesirow Financial.
“The numbers are not dramatically off,” he said. “That’s maybe the first year in a while where they haven’t been a somewhat significant negative. So, it’s probably somewhat calming on the market.”
In the past, several factors have led to the deviation, according to Curtis Erickson, head of high-yield municipal trading at Mesirow.
For one, the standard deviation of cigarette consumption has been massive, Erickson said. What’s more, new taxes over the past couple of years and the lingering effects of the recession have made accurate estimates difficult, he added.
“It seems like it was within expectations [in 2012],” Erickson said. “But the market is always anticipating it could be a lot worse than people thought it could come in.”
So far in 2012, investors have seen tobacco bonds trade up. Long Ohio buckeyes — an abbreviation for Buckeye Tobacco Settlement Finance Authority, a conduit for passing through the MSA payments — are widely held and show the real movement of the tobacco bond market, traders say.
Since the beginning of this year, the bonds are up 40 basis points, Erickson said. And on a total return basis, buckeyes are up about 8% from the beginning of the year to Monday.
According to one measure, buckeyes have outperformed the high-yield muni market. The Standard & Poor’s high-yield muni index, which can be used as a proxy for the high-yield muni market, was up 5.73% for the same period, Erickson said.
“Part of the characteristic is [buckeyes are] a higher-yielding security. So, it will tend to outperform a higher-rated index,” Erickson said. “The yield on the S&P index is about 6%. The yield on the buckeyes is 8%. So, with that alone, you’re getting 200 basis points for just being a static holder.”
