Wed 02/07/2024 15:08 PM
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Relevant Documents:
Unaudited Financial Statements - Fiscal Year Ended June 30, 2023
Continuing Disclosure for Series 2020 Bonds
Minutes of the Sept. 21, 2021, meeting
Offering Circular - Series 2020 Senior Bonds
Offering Circular - Series 2007 Bonds

The state of Ohio has not resolved a dispute with tobacco manufacturers regarding the nonparticipating manufacturers’, or NPMs’, adjustment for the sale years 2005, 2006 and 2007, according to market sources.

While Ohio received a $35 million award for the 2004 NPM disputed payments, the outcome of the NPM adjustment arbitration for the 2005 to 2007 sales years is still pending since each annual arbitration process is a fresh start, according to one source.

An adverse NPM adjustment ruling for Ohio might negatively affect the amount of upcoming tobacco settlement revenue, or TSR, received by the state, which is used to service approximately $5.3 billion in debt and reserves for the Buckeye Ohio Tobacco Settlement Authority.

The NPM adjustment was part of the 1998 master settlement agreement, or MSA, between the participating manufacturers, or PMs, and state attorneys general. The MSA stipulates that the settling states must enforce a state-level qualifying statute that would protect the market share of the PMs from the NPMs. If an arbitration panel finds that a state did not diligently enforce its qualifying statute, the PMs would get back the NPM adjustment previously made to the state.

The last publicly available mention of an arbitration panel for the 2005-2007 sales years involving Ohio specifically was in the minutes of a Sept. 21, 2021, meeting of the authority. “A panel of former federal judges have [sic] been selected for the next arbitration which involves diligent enforcement relating to the NPM adjustment from 2005 through 2007,” the notice reads. “The parties are in the discovery process for this arbitration.”

More recently, Ohio was included as one of the arbitrating states in a common case hearing that is attached to an arbitration case for the Washington state Tobacco Settlement Authority, as reported. There has been, however, no public update such as timing or outcome of an individual hearing for Ohio.

Ohio’s Attorney General Office did not respond to a request for comment.

During the fiscal year ended June 30, 2023, the authority’s total assets increased slightly to $1.2 billion from $1.1 billion the year prior, according to the most recent financial statements. Total deferred outflows of resources, which include deferred charges on refunding losses and deferred payments to the state, decreased to $3.6 billion from $3.8 billion year over year, while total liabilities remained roughly unchanged at $5.5 billion.

Total revenue reached $386 million in fiscal year 2023, up 4.3% from $370 million the previous year. Total expenses declined slightly to $348 million from $350 million, resulting in an increase in net position of $37 million compared with $19 million in FY 2022.

Total TSR payments received by Ohio were $320 million in 2023, $308 million in 2022 and $306 million in 2021, according to a National Association of Attorneys General report as of Nov. 6. The debt service coverage ratio for the authority’s Series 2020A bonds was 3.27x, 3.48x and 3.33x, respectively, for the same three years.

In February 2020, the authority issued $5.3 billion in tobacco settlement asset-backed senior Series 2020 refunding bonds to refund or defease its Series 2007 bonds. The bonds are structured as shown below:

Its $42.91 million 5% Series 2020A-2 refunding bonds due June 2034 last traded with $6 million in volume on Friday, Feb. 2, at 108 cents to yield 3.5%, which is at a discount compared with its issuance price at 130 cents to yield 1.78% in February 2020, according to secondary trading data on EMMA.

The authority had previously issued a similar amount of approximately $5.5 billion in tobacco settlement asset-backed bonds in October 2007 to securitize the projected tobacco settlement revenue as part of the 1998 MSA. Proceeds of Series 2007 bonds were used to fund capital projects at state-supported higher education institutions and pay the state’s share of the cost of building elementary and secondary schools.

The structure of the Series 2007 bonds in principal amount at issuance is as follows:

  • $211.35 million in Series 2007A-1 senior current interest serial bonds;

  • $4.72 billion in Series 2007A-2 senior current interest turbo term bonds;

  • $274.75 million in Series 2007A-3 senior convertible capital appreciation turbo term bonds;

  • $191.26 million in Series 2007B first subordinate capital appreciation turbo term bonds; and

  • $128.18 million in Series 2007C second subordinate capital appreciation turbo term bonds.

The breakdown of use of proceeds for the Series 2007 is detailed below, according to the offering memorandum.

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