By Joan Gralla
July 12 The majority of tobacco bonds sold by
U.S. states, counties and cities will default if cigarette
consumption keeps falling at a 3 percent to 4 percent annual
pace, Moody's Investors Service said on Thursday.
Municipal tobacco bonds are backed by the more than $200
billion in payments cigarette-makers agreed to make over time to
states to help pay for the costs of treating ailing smokers.
Under the scenario of declining smoking that Moody's
projected, "Bonds constituting 74 percent of the aggregate
outstanding balance of all the tobacco settlement bonds will
default," the Wall Street credit agency said in a statement.
Some 15 tranches that make up 33 percent of the rated bonds
would default if cigarette consumption declines 3 percent a
year, Moody's said. Another 25 tranches, equal to 41 percent of
the outstanding debt, would default if consumption declines 4
percent a year.
A Moody's spokesman said the credit agency has never
predicted any possible date of any defaults.
James Colby, chief municipal strategist for Van Eck Global,
said he had not seen the Moody's report, but "Prior analyses
have suggested that the earliest that some of these will exhibit
stress is four to five years off."
Moody's rates a total of $20.4 billion in 32 tobacco bond
securitizations. Some 79 percent of them are rated B1 or lower.
That speculative grade rating is three notches above the
"substantial risk" ranking.
Moody's, in a chart, ranked the bonds it rates by their
break-even point in consumption. The break-even estimates the
rate of decline in cigarette consumption that would lead to a
default for each bond. For example, debt with an average
consumption break-even rate of more than 24 percent is rated A1.
Debt with a break-even point of just above 2 percent is rated B3
Arkansas Development Finance Authority Tobacco Settlement
Revenue Bonds, Series 2001, have a break-even point of more than
In contrast, California County Tobacco Securitization Agency
(Los Angeles County Securitization Corporation) Series 2006A
Convertible Turbo Bonds have a break-even point of 3.5 percent
to 4 percent.
After the Moody's release, yields for a few tobacco bonds
The 2047 Buckeye Ohio tobacco bonds traded at yields ranging
from 7.3 percent to 7.5 percent just a few minutes after the
Moody's report, according to pricing data compiled by Municipal
Market Data, a Thomson Reuters company. Earlier that morning,
issues changed hands at 7.6 percent to 7.7 percent.
"Because we are in this low interest rate environment, and
will continue to be for some time, tobacco (debt) because of its
liquidity ... is actively sought after," said Colby.