The Virginia Tobacco Settlement Financing Corp. plans to draw on reserves because revenues won't be sufficient to pay debt service.

The unscheduled draw will occur Dec. 1, and reflects financial difficulty, the corporation said in a material event notice posted on EMMA May 22.

Some $2.8 million will come from the senior liquidity reserve account to pay interest. The balance left in the reserve account will be about $82.58 million, the notice said.

Virginia is not the only state to file such notices well in advance of tapping reserves, according to Dick Larkin, senior vice president and director of credit analysis for HJ Sims & Co.

"I'm surprised it took Virginia this long", said Larkin, who follows asset-backed tobacco bonds.

Earlier this month, Ohio officials said they will be forced to dip into reserve funds later this year to cover debt-service payments on the Buckeye tobacco bonds.

"While I haven't re-run my cash flow projections, my gut tells me not to be surprised if you see similar notices for New Jersey and the unenhanced Golden State tobacco bonds," Larkin said. "Just a strong hunch before I re-run my cash flow model adjusted for this year's payments and the next three years of negative adjustments for all those states that settled."

In December 2012, Virginia and 16 states, along with Washington, D.C., and Puerto Rico settled payment disputes between 2003 and 2012 with major tobacco manufacturers. Collectively, those settling received about 54% of the disputed payments, which resulted in a one-time "windfall" payment that allowed some to restore reserves.

The agreement also allowed manufacturers to reduce payments to the jurisdictions between 2014 and 2017.

Virginia received $28 million from the settlement and replenished the senior liquidity reserve fund to the required level, according to the Tobacco Settlement Financing Corp.'s 2013 audit.

The corporation said circumstances that could improve its financial position include successful settlement of a $50.4 million claim related to guaranteed investment contracts with bankrupt Lehman Brothers Special Financing Inc., which objected to the amount.

A higher rate of return on expected investment earnings would also help, the state said, though there is uncertainty about future tobacco settlement revenue collections due to the declining use of tobacco products.

Some $1.15 billion of bonds are outstanding. Standard & Poor's ratings range from 'B-' to as low as 'CCC'. Moody's Investors Service assigns a 'B3' rating to certain maturities.

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