California, Ohio Use Reserves for Tobacco Bonds

California, Ohio and Virginia will use reserve funds to pay interest and principal on bonds backed by tobacco company payments under a 1998 health-care settlement, according to a report by Herbert J. Sims & Co.

Payments to the states by Altria Group Inc. (MO)’s Philip Morris unit, Reynolds American Inc. (RAI) and other companies have declined on lower U.S. cigarette sales and as the companies lose market share to tobacco manufacturers that didn’t participate in the settlement, according to Richard Larkin, director of credit analysis at Sims in Iselin, New Jersey.

“Any time you see a municipal bond go to their reserve fund, it’s a significant sign of trouble,” Larkin said in a telephone interview. “It’s not an imminent default, but it’s a sign that cash flow is certainly far weaker than any of us thought.”

U.S. states have more than $107.6 billion in outstanding bonds backed by the 1998 settlement, according to data compiled by Bloomberg. Under the settlement, tobacco companies agreed to reimburse states $246 billion for treating smoking-related illnesses. The companies make annual payments each April.

The amounts paid to the states declined 5.6 percent this year, mostly because Altria’s Philip Morris decided for the first time to withhold disputed payments, Larkin said, citing data from the National Association of Attorneys General. In 2010, the payments fell 16 percent after the federal government raised cigarette excise taxes 61 cents.
Payments in Escrow

Since 2005, Reynolds and Lorillard Inc. (LO) have put a portion of their payments into an escrow fund, arguing that they’re entitled to refunds because they’ve lost market share to other producers such as National Tobacco Co. LP, which didn’t sign the 1998 accord.

Philip Morris made its full payments to the states, even though the tobacco company disputed them, until this year, when it withheld $267 million, Larkin said. Philip Morris disclosed the escrow payment in an April 15 statement.

California’s Golden State Tobacco Securitization Corp. and Ohio’s Buckeye Tobacco Settlement Financing Authority may use debt-service reserves to meet the minimum required interest payments on Dec. 1, according to bond filings.

The Virginia Tobacco Settlement Financing Corp. will need to use debt reserve funds for its Dec. 1 payment, he said.

Issuers such as Golden State are special entities set up to sell debt backed by the tobacco-settlement money. The states don’t guarantee interest and principal payments on the bonds.
California Reserve Plan

California plans to draw $5.35 million from reserves to help make a $68.3 million interest payment on series 2005 bonds and $7.7 million to make a $87.9 million interest payment of series 2007 bonds, both due Dec. 1, said Tom Dresslar, a spokesman for Treasurer Bill Lockyer.

“Like any other issuer, the state doesn’t relish, to say the least, being forced to draw on reserves,” Dresslar said. “Hopefully, we won’t have to be in that position again.”

Kurt Kauffman, Ohio’s debt manager, said his state expects to use $6 million to $8 million in reserves in December, based on current projections.

“We have a $389 million funded reserve so that offers a significant degree of protection to investors,” Kauffman said in a telephone interview.

Virginia’s director of debt management, Evelyn Whitley, said her state will draw $3.6 million from reserves to make a Dec. 1 interest payment.

“I don’t think it should come as any great surprise,” Whitley said. The state filed a notice when it didn’t make sinking-fund payments last year, she said, and investors “realized it was cutting it close then.”
Lower Investment Returns

Besides payment declines, California and Virginia also received lower-than-expected investment returns on their debt- service reserves, Larkin said. Both states put the money in investment contracts with Lehman Brothers Holdings Inc. (LEHMQ), which filed for bankruptcy in 2008, he said.

While it’s unlikely that more Americans will take up smoking, the outlook for tobacco bonds may improve if U.S. states win a legal challenge to the companies that are withholding payments, Larkin said. About $2 billion held in escrow would go to the states, he said.

“That boost in cash flow would be significant,” Larkin said. “If the states lose, it will look a lot worse.”

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Smokers See Some Smoking Brands As Safer

One in five smokers believes some brands of Lucky Strike cigarettes are safer than others, a study has found. Smokers of ”gold”, ”silver” or ”slim” cigarettes were also more likely to think their brands were less harmful. The findings highlight the power that packaging can have on risk perception, and come as the federal government prepares to introduce its plain-packaging legislation.

As part of an international study, published in the journal Addiction, researchers surveyed more than 8000 current and former smokers, including more than 2000 Australians, about their smoking beliefs.

Females were more likely to believe some brands might be less harmful while older individuals considered their cigarettes brand was safer.

More than a third of respondents falsely believed nicotine was linked to cancer, and 41 per cent believed light cigarettes were better for them.

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Danville company proposes new use for tobacco

If a new company at Dan River Business Development Center has its way, that will happen — but the product will be used to create biofuels instead of cigarettes.
Peter Majeranowski, a founder and managing director of Tyton BioSciences, said years of development have gone into the product, which will be genetically modified to produce “both ethanol and biodiesel at yields that far surpass the traditional crops of corn and soy.”
And, because corn and soy are also food crops, using tobacco to create the same products can alleviate the complaints that food prices are rising because of demand for crops as fuel, Majeranowski said.
Smoking-grade tobacco was much more difficult to grow than the crop his company is developing, Majeranowski said.
Farmers will be able to plant between 80,000 to 100,000 plants per acre, rather than the average 6,000 plants per acre of smoking-grade tobacco. It can be mechanically harvested and can be processed “green,” as opposing to going through the drying process that smoking-grade tobacco goes through. Tobacco fields for biofuels also can yield two to three harvests a year, Majeranowski said.
“We can chop it close to the ground, and it grows back,” Majeranowski said. “We don’t have to worry about flavor, just how many green leaves and stems we can get per acre.”
The seeds are still being tested, but the company has successfully processed the genetically altered plants to extract sugars for ethanol and oil for biodiesel fuel; the process has a patent pending on it, Majeranowski said.
During processing, sugar for ethanol and oil for biofuel are extracted, both in larger quantities than comparable amounts of soy or corn, Majeranowski said.
According to Majeranowski, the group was encouraged by Gov. Bob McDonnell’s office to visit Danville, and Secretary of Agriculture and Forestry Todd P. Haymore recommended they talk to the Institute for Advanced Learning and Research about their project.
Majeranowski said he met with Liam Leightley, executive director at the institute, and Barry Flinn, who directs the Institute for Sustainable and Renewable Resource, and was impressed with the facility. The new Sustainable Energy Technology Center at the institute also was one of the reasons that Tyton BioSciences chose Danville for its new home.
“It’s just five minutes from our office,” Majeranowski said. “We will collaborate on certain parts of our research; it’s a great fit for us.”
Next week, the company hopes to learn whether it will get a $2.2 million grant from the Tobacco Commission, which, combined with about $2 million of its own investment, will get the new seeds closer to the production stage.
Majeranowski said: “We have committed to stay in Danville beyond the potential Tobacco Commission grant period because of Danville’s rich tobacco history and growing know-how, as well as its new research facilities.
“We are also excited to help re-ignite the agricultural community with a new tobacco crop that can help the country break its addiction to foreign energy.”

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Tobacco Company to Develop Products without Tobacco

British American Tobacco (BAT) PLC announced their plans to create a new company called Nicoventures Ltd. which will produce products made without tobacco and with only pure nicotine in an effort to offer a safer alternative to smokers. Even though a spokeswoman of the organization said the products the company is considering aren’t on the market yet and declined to give any more details, we do know that two subsidiaries of Altria Group are testing spit-free tobacco-coated toothpicks in an effort to offer tobacco in a less socially scrutinized way.

If successful, the products of Nicoventures could help wean smokers off cigarettes. It is the hope of BAT that Nicoventures will be a highly profitable business that will help make up for the loss in profits due to the decrease in cigarette sales and the scrutiny faced by tobacco companies. “Nicoventures could be a hugely positive development from the public health point of view, in reducing the harm from smoking”, said David Sweanor of the University of Ottawa in Canada. However, he did admit he was a bit skeptic, saying that nothing currently on the market had the ability to match the sensational and psychological effects of a cigarette that smokers crave for.

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KT&G rules slim cigarette market with best-selling Esse

What is the best-selling cigarette brand in the world? Most smokers would name one from multinational juggernauts Philip Morris, British-American Tobacco (BAT) or Japan Tobacco.
As far as super-slim cigarettes are concerned, however, Korea’s KT&G dominates with its Esse cigarettes brand, which has steadily remained in the lead.
The country’s largest tobacco manufacturer said Monday that it sold 42.2 billion cigarettes of Esse last year to chalk up a 44.5-percent growth from 2009 when 29.2 billion were sold.
In particular, the Seoul-headquartered outfit almost doubled its exports of Esse from 11.2 billion cigarettes in 2009 to 20.8 billion last year to top the podium in competition with Virginia Slims marketed by Philip Morris and Vogue by BAT.
In 2009, the latest data available, Esse racked up sales of 29.2 billion cigarettes compared to 17 billion for Virginia Slim and 11 billion for Vogue, according to London-based consultancy Euromonitor International.
“Since its inception in 1996, we have nurtured Esse as a global brand. It is currently available in around 40 states and regions including Russia and the Middle East,’’ said Huh Up, who is in charge of the firm’s global businesses.
“In particular, Esse is presently the top-selling super-slim cigarette in Iran, Uzbekistan and Indonesia. In Russia it accounts for more than 10 percent in the segment.’’
Huh added that the former state monopoly has tapped into the global markets throughout the past decade as the local market showed saturation.
In achieving its initiative to make Esse a global product, KT&G demonstrated its potential at various events.
Currently, it accounts for 85 percent of the domestic consumption of super-slim tobaccos.
When its sub brand Esse Soun debuted in 2006, it took just eight days to reach the benchmark of selling 10 million packs in the shortest period in the history of the company.
Esse also boasts of other sub brands such as the premium Esse Golden Leaf as well as Esse Edge which targets young smokers.
“On top of exporting Esse to other countries, we have established a set of factories abroad to generate products with local relevance,’’ Huh said.
“In addition to Esse, we are determined to foster a host of globally famous brands through vigorous efforts to become a genuine international player.’’
Indeed, KT&G channeled up to $100 million in order to set up production lines of the Esse products in the Kaluga region, approximately 150 kilometers of south of Moscow, last October.
The factories churn out 4.6 billion cigarettes per year targeting the smokers of the world’s second-largest market in terms of sales, trailing just China.
In addition, the company also operates cigarette factories in Turkey and Iran, both of which opened in early 2008 with a combined annual capacity of 5.6 billion cigarettes.

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Plainly put, cigarette packaging matters

This week our government committed itself to the removal, albeit slowly, of cigarette displays in shops. But plain packaging on cigarettes has been delayed for further consultation.

The Unite union is unimpressed. It represents 6,000 people in tobacco production and distribution, and put out a statement: “Switching to plain packaging will make it easier to sell illicit and unregulated products, especially to young people.” This, the union added, “may increase long-term health problems”.

Tory MP Philip Davies said: “Plain packaging for cigarettes would be gesture politics … it would have no basis in evidence.”

Everyone is entitled to their own opinions, but not, sadly, their own facts. Cigarette packaging has been used for brand-building and sales expansion, and that is bad enough; but it has also been used for many decades to sell the crucial lie that cigarettes which are “light”, “mild”, “silver”, and the rest, are somehow safer.

This is one of the most important con tricks of all time: people base real decisions on it, even though low-tar cigarettes are just as bad for you as normal cigarettes, as we have known for decades. Manufacturers’ gimmicks, like the holes on the filter beside your fingers, confuse laboratory smoking machines, but not people. Smokers who switch to lower-tar brands compensate with larger, faster, deeper inhalations, and by smoking more cigarettes.

The collected data from a million people shows that those who smoke low-tar and “ultra-light” cigarettes get lung cancer at the same rate as people who smoke normal cigarettes. They are also, paradoxically, less likely to give up smoking.

So the “light”, “pale” and “mild” packaging sells a lie. But do people know this? In data from two population-based surveys, a third of smokers believed incorrectly that “light” cigarettes reduce health risks, and were less addictive (it’s 71% in China (pdf)). A random telephone-digit survey of 2,120 smokers found they believed on average that “ultra lights” convey a 33% reduction in risk. A postal survey of 500 smokers found a quarter believed “light” cigarettes are safer. A school-based questionnaire of 267 adolescents found once again, as you’d expect, that they incorrectly believed “light” cigarettes to be healthier and less addictive.

Where do all these incorrect beliefs come from? Careful manipulation by the tobacco industry, as you can see for yourself, in their internal documents available for free online. They explicitly planned to deter quitters with “mild” products, which were made to seem safer and less addictive.

But more than 50 countries, including the UK, have now banned a few magic words like “light” and “mild”. So is that enough? No. A survey of 15,000 people in four countries (pdf) found that after the UK ban, there was a brief dip in false beliefs, but by 2005 we bounced back to having the same false beliefs about “safer-looking” brands as the US.

This is because brand packaging continues to peddle these lies. A street-interception survey (pdf) from 2009 of 300 smokers and 300 non-smokers found that people think packages with “smooth” and “silver” in the names are safer, and that cigarettes in packaging with lighter colour, and a picture of a filter, were also safer.

Of course tobacco companies know this (pdf). As the Philip Morris tobacco company said in an internal document, entitled Marketing New Products in a Restrictive Environment: “Lower delivery products tend to be featured in blue packs. Indeed, as one moves down the delivery sector, then the closer to white a pack tends to become. This is because white is generally held to convey a clean, healthy association.”

If you’re in doubt of the impact this can have, “brand imagery” studies show that when participants smoke the exact same cigarettes presented in lighter coloured packs, or in packs with “mild” in the name, they rate the smoke as lighter and less harsh, simply through the power of suggestion. These illusory perceptions of mildness, of course, further reinforce the false belief that the cigarettes are healthier.

But these aren’t the only reasons why banning a few words from packaging isn’t enough. A study of 600 adolescents, for example, found that plain packages increase the noticeability, recall, and credibility of warning labels.

There’s no real doubt that the extended, complex, interlocking branding and packaging machinations of cigarette companies play a big role in misleading smokers about the risks, by downplaying them, and sadly nothing from Unite – for shame – or some Tory MP will change that.

If you don’t care about this evidence, or you think jobs are more important than people killed by cigarettes, or you think libertarian principles are more important than both, then that’s a different matter. But if you say the evidence doesn’t show evidence of harm from branded packaging, you are simply wrong.

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