Favorable ruling for Big Tobacco on state payments.

In an interesting twist to the tobacco settlements, an independent arbitrator ruled yesterday that the nations cigarette makers have lost enough market share as a result of their 1998 legal settlement with 46 states to enable them to reduce their payments to the states.

The ruling makes it highly likely that Altria Group, RJR and Loews will be able to cut about $1.2 billion from the payment they own the states next month, and possibly see further reductions in the future as well.

What makes this so fascinating is that the states have become so dependant upon this cash flow that many of their bond ratings are tied to the annual, predictable receipt of these payments, and to have it reduced could actually impair their ability to raise money at lower rates on bonds they issue in future years.

Expect the state attorney's general to litigate this if they don't get the full payment, but this clearly marks the start of a new phase in the tobacco settlement, and one that might favor the companies over the states, as opposed to the climate 8 years ago when they were originally settled.