TOBACCO BONDS: FOR A SECTOR THAT’S SUPPOSED TO BE STRUCTURED , IT’S BECOMING AN AMORPHOUS BLOB OF UNPREDICTABLE VARIABLES 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.
DICK LARKIN, HJ SIMS DIRECTOR OF CREDIT ANALYSIS • 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
DISCLAIMER • 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
HIGHLIGHTS OF 2013 -2014 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
MORE HIGHLIGHTS OF 2013 -2014 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
UPDATED HISTORICAL SHIPMENT NUMBERS THROUGH JUNE 2014 Richard Larkin, Director of Credit Analysis
LARKIN’S DEFAULT FORECASTS: NOW, VS 2011 & 2013 Richard Larkin, Director of Credit Analysis
How -5% Shipment Decline Assumption Dramatically Worsens Credit Quality: NJ 2007 Richard Larkin, Director of Credit Analysis
OHIO BUCKEYES: THE DIFFERENCE BETWEEN LOSING OR WINNING THE NEXT 10 ARBITRATIONS Richard Larkin, Director of Credit Analysis
DO YOUR OWN HOMEWORK: LARKIN’S PROJECTIONS OF TOTAL ANNUAL & STRATEGIC MSA PAYMENTS 2014 -2041 @ -4% & -5% SHIPMENT DECLINES (Unadjusted for Arbitration or Side Agreements Richard Larkin, Director of Credit Analysis
LOWER PAYMENTS TO “SIDE AGREEMENT STATES” PROJECTED FOR 2014 -2015 -2016 -2017 Richard Larkin, Director of Credit Analysis
FOR MORE INFORMATION: • 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/
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