Standard and Poor’s rates the securities maturing in 2016 through 2023 A, or five steps below top grade; those due in 2024 through 2033 A-, one level lower; and the 2035 maturity BBB+. The ratings reflect the likelihood of timely payments, tobacco company credit quality, the deal’s structure and the presence of about $57.3 million in a liquidity reserve account, S&P said.
The 1998 accord that 46 states struck with Phillip Morris USA (PM), Reynolds American Inc. (RAI) and Lorillard Inc. (LO) required the companies to pay more than $200 billion to resolve their liability in litigation over health costs related to smoking cheap cigarettes. About $101 billion of municipal debt is backed by the payments, which are based on cigarette shipments.
Tobacco munis produced a 0.48 percent year-to-date total return through June 20, compared with a 2.13 percent loss for the broad muni market, according to Barclays Capital indexes.
A Louisiana tobacco bond maturing in May 2039 traded June 21 at an average yield of 5.88 percent, with the spread averaging 2.16 percentage points over benchmark munis of the same maturity, according to data compiled by Bloomberg. On Jan. 2, the tobacco bond had an average yield of 3.73 percent, a risk premium of 1.03 percentage points.