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Investing in the High Yield Municipal Market: How to Profit from the Current Municipal Credit Crisis and Earn Attractive Tax-Exempt Interest Income by Triet Nguyen

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Tobacco Settlement Bonds

Securitized tobacco settlement bonds originated in 1999, the year after 46 states and several U.S. territories agreed to settle class action suits against many, but not all, of the companies that manufacture and ship cigarettes within the United States in return for annual payments totaling billions of dollars, as well as other terms that restricted marketing by companies that agreed to the settlement. The settlement is known as the Master Settlement Agreement, or MSA.

Tobacco settlement bonds are not paid from cigarette taxes. The money to pay the bonds comes from the legal settlement. The settlement protects cigarette companies from state lawsuits for medical costs associated with diseases linked to tobacco use.

Does that mean cigarette companies are immune to lawsuits tied to tobacco use? No. Tobacco companies can still be sued by individuals and class actions for health damages from tobacco use; the history of the last 10 years, however, shows that tobacco companies have been very successful in defending against suits brought by individuals and groups in class actions. In 2004, the major cigarette manufacturers lost a suit by the U.S. Department of Justice (DOJ), but successfully avoided over $280 billion of penalties sought by the government. Many individual and nonstate-originated class action lawsuits remain outstanding, which could damage the future profitability of tobacco manufacturers in the United States.

Since 1998, states have been collecting ...

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