Cashing in tobacco settlement in limbo for Virginia
SOUTH BOSTON, Va. (AP) _ Multibillion-dollar court judgments against big tobacco companies, war in Iraq and uncertainties of the bond markets have put Virginia's plans to cash in part of its portion of a national tobacco settlement in limbo.
Three days before the state was close a deal that would have netted $645 million for areas hard hit by the downturn in the tobacco industry, the deal was put off indefinitely, state Treasurer Jody Wagner told the Virginia Tobacco Indemnification and Community Revitalization Commission on Thursday.
On March 21, one day after the state reached an agreement to a sale that would gross $767 million _ almost $50 million more than Wall Street financial underwriters had estimated _ the market plunged on news of a $10 billion Illinois tobacco lawsuit judgment against Philip Morris USA.
Ten days later, just ahead of an April 3 date to close the sale, bond underwriters alarmed by climbing interest rates the state would have had to pay, warned Virginia not to proceed with the sale, Wagner told the commission during a meeting at the luxurious Berry Hill Mansion hotel.
Now, Wagner said, nobody knows when Virginia can complete the deal to cash in the commitments Virginia is due through 2018, a process insiders call "securitizing."
"Where we are today is I don't know," Wagner said. "We don't know what's going to happen, we're going to watch the market, ... and if it becomes financially feasible to move forward, we will."
In 1998, four tobacco companies agreed to settle states' claims for smoking-related health care costs by paying them $206 billion over 25 years. Philip Morris, the largest in the group, pays about half the settlement, which covers 46 states.
The buildup and onset of war in Iraq and news of a Justice Department probe of tobacco companies shook investor confidence in tobacco companies. The critical blow, however, was the Illinois court judgment against Philip Morris and a judge's decision to set an even higher bond for the company to appeal: $12 billion.
The cigarette giant said it didn't have the money to pay so high a bond and warned states that it would not be able to make its $2.6 billion payment on April 15 unless the bond was lowered. Last week, the Illinois judge reduced the bond by half, and Philip Morris made its payments on schedule.
The developments, however, drove interest rates Virginia would pay to bondholders from about 6.5 percent to more than 7.7 percent, reducing the state's take by tens of millions of dollars. With that judgment pending and a $145 billion judgment in a Florida smokers' lawsuit in 2000 still on appeal, markets for tobacco-backed bonds are shaky, Wagner said.
"On the one hand, it is very upsetting to all of us that we weren't able to complete the transaction. We were just three days away," Wagner said. On the other hand, she said, 27 percent of the investors would have been Virginians who could have lost money had the deal gone through.
State Sen. Charles Hawkins, the commission chairman, said the state isn't losing cash _ at least not now. What it missed was the chance to put the money under the long-term control of Virginia and shielding it from the long-term risks to tobacco companies and the stock markets.
"I think securitization gives us the security we need for long-term planning," said Hawkins, R-Pittsylvania.