PM PAYS ITS SHARE OF
MASTER SETTLEMENT AGREEMENT
Philip Morris, the largest company involved in the Master Settlement
Agreement (MSA), made its full 2006 payment of $3.4 billion last
week. With a 50% market share of all domestic cigarette shipments,
Philip Morris pays half of the payments due to states under the
agreement. Other tobacco makers, including R. J. Reynolds and Lorillard,
have so far made partial payments, or are awaiting the April 17,
2006, deadline.
Philip Morris' move means the MSA will continue to receive its
payments this year without interruption - a significant fact for
investors holding tobacco settlement bonds. Many "turbo"
or accelerated payments are likely to be paid as well.
The willingness of Philip Morris to make its full payment comes
on the heels of an arbitrator's recent ruling that the MSA, itself,
caused the companies who were originally part of the agreement to
lose market share. As a result of the arbitrator's report, manufacturers
had sought to reduce their payments this year by 18%.
A provision in the MSA, known as the Non-Participating Manufacturer's
Adjustment, allows tobacco companies to withhold part of their annual
payment if it can be proved that the agreement itself caused a loss
of market share. The companies must also prove that the states failed
to diligently enforce the MSA. The arbitrator ruled on the market
share loss provision, but state enforcement efforts have yet to
be determined. A final determination will not come soon as enforcement
will have to be examined on a state-by-state basis.
Big news for investors
The payment by Philip Morris is a positive development because
it signals intent to observe the agreement and cooperate with the
states attorneys general to resolve disputes. With the largest tobacco
manufacturer now having made its payment, pressure is increased
on other companies who are part of the MSA to follow suit. The states
have already publicly declared their intent to reach accommodation
with the tobacco manufacturers on this matter.
Assuming the other manufacturers follow Philip Morris' lead, both
sides will have shown a willingness to reach an agreement on a potentially
financially damaging issue that is key to the long-term strength
of the MSA. While the current dispute is not fully resolved, and
all manufacturers have yet to make their annual payment, we remain
encouraged that a final resolution satisfactory to both sides is
in the offing.
3/29/06
About Dr. Abrams
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