Burning Bonds

Meredith Whitney didn’t predict it, but there’s one muni market that’s facing financial trouble: tobacco bonds.

In the early ‘90s a bunch of State’s Attorneys General sued the tobacco companies alleging fraud and deception. In 1998 the States settled with the tobacco companies for payments of about $200 billion over twenty-five years, based on sales. Now about $4.40 per carton is paid out to the States.

Rather than wait for the revenue to come in, many states securitized them and borrowed against the revenues. Such “Tobacco Bonds” were considered a good risk until the recession hit. Then people found new motivation to quit smoking.

Last November S&P downgraded half of the entire tobacco bond universe to junk status. That sparked a sell-off in the bonds, just when Meredith Whitney was predicting fiscal Armageddon in cities and counties around the country as well. While her dire predictions haven’t panned out, tobacco bonds remain risky: the population of smokers continues to decline, and the settlement imposed such high prices that smoking has become a luxury that many have decided they just can’t afford, especially now. The bonds are cheap—even investment-grade bonds yield over 5%.

But you get what you pay for. If muni investors want to take a flyer on cigarette sales, that’s their right. But they shouldn’t be surprised if their profits go up in smoke.

Douglas R. Tengdin, CFA
Chief Investment Officer
Hit reply if you have any questions—I read them all!

Follow me on Twitter @GlobalMarketUpd

direct: 603-252-6509
reception: 603-224-1350

www.chartertrust.com • www.moneybasicsradio.com • www.globalmarketupdate.net
By | 2014-09-12T10:41:53+00:00 September 15th, 2011|Global Market Update|0 Comments

About the Author:

Mr. Tengdin is the Chief Investment Officer at Charter Trust Company and author of “The Global Market Update”. The audio version of each post can be heard on radio stations throughout New England every weekday. Mr. Tengdin graduated from Dartmouth College, Magna Cum Laude. He received his Master of Arts from Trinity Divinity School, Magna Cum Laude and received his Chartered Financial Analyst (CFA) designation in 1992. Mr. Tengdin has been managing investment portfolios for over 30 years, working for Bank of Boston, State Street Global Advisors, Citibank – Tunisia, and Banknorth Group. Throughout his career, Mr. Tengdin has emphasized helping clients manage their financial risks in difficult environments where they can profit from investing in diverse assets in diverse settings. - Leave a comment if you have any questions—I read them all! - And Follow me on Twitter @GlobalMarketUpd

Leave A Comment