Richard Larkin, HJ SIMS
Director of Credit Analysis
October 2, 2014
SMITH’S RESEARCH & GRADINGS
HIGH YIELD MUNICIPAL BOND CONFERENCE
The material presented here is for information purposes
only and is not to be considered an offer to buy or sell any
security. This report was prepared from sources believed to
be reliable but it is not guaranteed as to accuracy and it is
not a complete summary of statement of all available data.
Information and opinions are current up to the date of
publication and are subject to change without notice. The
purchase and sale of securities should be conducted on an
individual basis considering the risk tolerance and
investment objective of each investor and with the advice
and counsel of a professional advisor.
•Joined
SIMS in 2008
•26 Years at 2 Rating
Agencies, 38 Years Total
Experience
•Former Chief Municipal
Rating Officer at S&P
•Chaired or Co-Chaired
Rating Criteria Committees at
Both S&P and Fitch
•Opinions
are mine & mine alone, not
necessarily shared by my employer, HJ SIMS,
who has allowed me to speak on this subject
•Not
a recommendation to buy, sell or hold
securitized tobacco settlement bonds



New projections for default are earlier than last year.
Primarily because the Tobacco Companies are still
withholding funds from all states, including those that
signed the “side settlement” agreement in 2012-13
Cash flows for NY issuers should improve by likely
arbitration wins that will earn them refunds of past
NPM holdings
More variables keep entering the structures, making
forecasts more difficult and with larger margins for
future error
Richard Larkin, Director of Credit Analysis





NAAG is cutting back on information needed to
analyze tobacco cash flows
The introduction of “losers” in the NPM arbitration has
caused ripples in winning and settling states
Ohio Buckeyes will be an interesting battleground in
the NPM arena—wins will dramatically improve cash
flows, but the Buckeyes won the first arbitration by the
“skin of their teeth”. Even so, default can’t be avoided.
Future average annual shipment declines: -4% or -5%??
Do you really understand the concept of extension risk
Richard Larkin, Director of Credit Analysis
US Domestic Cigarette Shipments 1997-2014 YTD
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2013 YTD
MSAi
528.3
504.0
458.6
459.1
444.4
427.9
406.1
398.8
385.2
376.0
357.2
345.3
315.7
303.7
293.1
286.5
273.3
128.6
Compound Annua l Ra te of
De cl i ne 1997-2013
(billions of cigarettes)
% change
TTB
% change
N/A
508.6
N/A
-4.60%
456.7
-10.22%
-9.00%
434.5
-4.86%
0.10%
422.5
-2.76%
-3.20%
412.1
-2.46%
-3.70%
395.2
-4.09%
-5.10%
376.7
-4.70%
-1.80%
375.6
-0.29%
-3.40%
363.0
-3.36%
-2.40%
364.6
0.44%
-5.00%
348.3
-4.46%
-3.33%
335.4
-3.71%
-8.57%
307.9
-8.19%
-3.80%
292.8
-4.93%
-3.49%
286.4
-2.19%
-2.25%
279.8
-2.27%
-4.61%
266.1
-4.91%
-4.17%
126.2
-5.13%
-4.04%
-3.97%
NAAG OPM
N/A
N/A
409.0
402.7
384.2
365.2
344.7
339.1
332.1
327.1
312.4
300.2
269.1
258.4
250.5
245.5
234.8
n/a
% change
N/A
N/A
N/A
-1.55%
-4.58%
-4.94%
-5.64%
-1.61%
-2.08%
-1.49%
-4.50%
-3.92%
-10.35%
-3.96%
-3.09%
-1.99%
-4.34%
n/a
-3.88%
Source s : MSAi i nforma ti on come s from Re ynol ds Ame ri ca n 10K re ports ; TTB da ta from Toba cco Ta x Bure a u;
NAAG da ta from Na ti ona l As s oci a ti on of Attorne ys Ge ne ra l YTD REPRESENTS THROUGH JUNE 2014
Richard Larkin, Director of Credit Analysis
Selected T obacco Bond Performance
Post 2005 Issuance
Issuer
State
Original Par Issuance
Yr Issued
Final Maturity
Performance
NJ
OH
VA
New Jersey
Ohio
Virginia
$3,436,225,000
$5,212,146,138
$1,052,185,000
2007
2041
2007
2047
2007
2047
2011 Default Forecast
22% of the 2029 maturity
defaults; $1.176 bilion of
seniors and 1.281 million of
subordinated debt remain
unpaid in 2041; debt reserves
drawn starting 2023
30% of the 2024 maturity
defaults; $2.768 billion of
91% of the 2046 maturity
seniors (representing 2037s,
defaults in 2046; %990 million
2042s qnd 2047s) and $3.207
unpaid by 2047 (representing
billion of subordinated debt
both 2046 and 2047 maturities.
unpaid by 2047; debt reserves
drawn starting 2011 and 2016.
2013 Forecast, After
Settlements And Arbitration
Results through Sept. 12,
2013
Debt service reserves
draw n in 2026 & 2029; 16%
of 2034s default; $840.1 or
66%% of 2041s unpaid.
6.4% of 2030s in default;
26% of 2034s go unpaid;
each maturity sees larger
defaults until 47s in default;
$891 or 64%
unpaid………..not paid in
full until about 2052
2014 Forecast,
Debt reserves draw n 201415-16-17; in 2047, 30% of
2046s and 100% of 2047s
Debt service reserves
Debt service reserves
draw n in 2014, 2023,
Debt reserves draw n in
draw n in 2016, 2017,
exhausted w ith default by
2014; by 2047, 53% of '46
exhausted w ith default by
2026; & 2029; 89% of 2041s
maturity unpaid and 100%
2024; & 2029; 2042s not
go unpaid; may take 7
of '47 maturity unpaid;
fully paid until 2047, & 100%
years to fully pay w ithout
could w ait 12 years before
of 2047s unpaid…could
interest accruing after 2041
all principal paid
take 8 years to fully repay.
maturity
Richard Larkin, Director of Credit Analysis
New Jersey Tobacco Bond Performance
Worsening Credit Quality Comparing Shipment Declines at -4% & -5%
Issuer
State
Original Par Issuance
Yr Issued
Final Maturity
Performance
2014 Forecast,
NJ at -4% Shipment Declines
NJ at -5% Shipment Declines
New Jersey
New Jersey
$3,436,225,000
$3,436,225,000
2007
2041
2007
2041
Debt service reserves drawn in 2014,
2023, exhausted with default by 2026;
58% of 2034s default, and 89% of 2041s
go unpaid; may take 7 years to fully
pay without interest accruing after
2041 maturity
Debt service reserves drawn in 2014,
2023, exhausted with default by 2026;
2034s miss 100% of principal due; by
2047, 2% of 34s remain unpaid & 100%
of 2041s unpaid
Richard Larkin, Director of Credit Analysis
OHIO BUCKEYE Tobacco Bond Performance
Improvement Attributable to Winning NPM Cases
Issuer
State
Original Par Issuance
Yr Issued
Final Maturity
Performance
2014 Forecast
OH Status Quo
Projections
OH Performance if it
Wins Next 10 Years of
Arbitration
Ohio
Ohio
$5,212,146,138
$5,212,146,138
2007
2047
2007
2047
Debt service reserves
drawn in 2016, 2017,
Debt service reserves not
exhausted with default by
drawn until 2024, defaults
2024; & 2029; 2042s not
not until 2030; by 2047, only
fully paid until 2047, & 100%
44% remain unpaid
of 2047s unpaid…could
take 8 years to fully repay.
Richard Larkin, Director of Credit Analysis
($ Millions)
MSA Payments at -4% Annual Decline
YEAR
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
2035
2036
2037
2038
2039
2040
2041
2042
2043
2044
2045
2046
2047
Projected
Annual
National
payments
$6,048.3
$5,995.0
$5,929.4
$6,585.8
$6,528.5
$6,463.5
$6,408.0
$6,353.6
$6,289.8
$6,237.1
$6,173.9
$6,122.9
$6,073.0
$6,024.2
$5,976.5
$5,930.0
$5,869.1
$5,824.2
$5,780.3
$5,737.7
$5,696.1
$5,655.7
$5,616.5
$5,578.4
$5,541.5
$5,505.8
$5,471.2
$5,437.9
$5,405.8
$5,374.9
$5,345.2
$5,316.8
$5,289.7
Projected
Strategic
National
payments
$725.5
$718.9
$712.3
$0.0
$0.0
$0.0
$0.0
$0.0
$0.0
$0.0
$0.0
$0.0
$0.0
$0.0
$0.0
$0.0
$0.0
$0.0
$0.0
$0.0
$0.0
$0.0
$0.0
$0.0
$0.0
$0.0
$0.0
$0.0
$0.0
$0.0
$0.0
$0.0
$0.0
Total
Projected
Annual
Receipts
$6,773.9
$6,713.9
$6,641.8
$6,585.8
$6,528.5
$6,463.5
$6,408.0
$6,353.6
$6,289.8
$6,237.1
$6,173.9
$6,122.9
$6,073.0
$6,024.2
$5,976.5
$5,930.0
$5,869.1
$5,824.2
$5,780.3
$5,737.7
$5,696.1
$5,655.7
$5,616.5
$5,578.4
$5,541.5
$5,505.8
$5,471.2
$5,437.9
$5,405.8
$5,374.9
$5,345.2
$5,316.8
$5,289.7
MSA Payments at -5% Annual Decline
Projected
Annual
National
payments
$5,871.3
$5,814.7
$5,784.2
$6,348.5
$6,234.1
$6,122.9
$6,014.7
$5,909.6
$5,785.2
$5,684.7
$5,587.2
$5,492.4
$5,400.5
$5,311.3
$5,224.9
$5,141.1
$5,060.1
$4,947.3
$4,869.9
$4,795.1
$4,722.7
$4,652.9
$4,585.5
$4,520.5
$4,458.0
$4,397.8
$4,340.0
$4,284.5
$4,231.4
$4,180.5
$4,132.0
$4,085.8
$4,041.8
Projected
Strategic
National
payments
$733.4
$730.7
$727.7
$0.0
$0.0
$0.0
$0.0
$0.0
$0.0
$0.0
$0.0
$0.0
$0.0
$0.0
$0.0
$0.0
$0.0
$0.0
$0.0
$0.0
$0.0
$0.0
$0.0
$0.0
$0.0
$0.0
$0.0
$0.0
$0.0
$0.0
$0.0
$0.0
$0.0
Total
Projected
Annual
Receipts
$6,604.8
$6,545.4
$6,511.9
$6,348.5
$6,234.1
$6,122.9
$6,014.7
$5,909.6
$5,785.2
$5,684.7
$5,587.2
$5,492.4
$5,400.5
$5,311.3
$5,224.9
$5,141.1
$5,060.1
$4,947.3
$4,869.9
$4,795.1
$4,722.7
$4,652.9
$4,585.5
$4,520.5
$4,458.0
$4,397.8
$4,340.0
$4,284.5
$4,231.4
$4,180.5
$4,132.0
$4,085.8
$4,041.8
Richard Larkin, Director of Credit Analysis
Master Settlement Allocations Under 2012 Side Agreement
State
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
AL
AZ
AR
CA
CT
DC
GA
KS
LA
MI
NE
NV
NH
NJ
NC
OK
SC
TN
VA
WV
WY
Puerto Rico
Share Within the
Side Agreement
3.36%
3.62%
1.81%
26.33%
4.43%
1.37%
5.05%
2.07%
5.05%
9.17%
1.35%
1.44%
1.52%
8.28%
5.04%
2.77%
2.63%
4.98%
4.20%
2.28%
0.67%
2.59%
100.00%
Projected Annual 12 1/2%
Refund Credits for 20142017
$7.12
$7.67
$3.83
$55.82
$9.39
$2.91
$10.70
$4.40
$10.71
$19.44
$2.86
$3.06
$3.22
$17.55
$10.69
$5.87
$5.57
$10.56
$8.91
$4.83
$1.41
$5.50
$212.00
Richard Larkin, Director of Credit Analysis
• Email Me at rlarkin@hjsims.com
• Access all of Dick Larkin’s reports and
commentaries on the HJ SIMS website
under SIMS INSIGHTS:
http://www.hjsims.com/news-andviews/sims-insights/