NEW YORK: More than two decades after Wall Street started pumping out a new type of bonds – those backed by the legal-settlement payments governments receive from cigarette companies – one batch has finally been driven into a default.
It almost certainly won’t be the last.
The securities allowed state and local governments to get the cash upfront by selling debt that’s repaid, gradually, when the proceeds roll in. That offloaded all the risk to investors, who were compensated with high yields in return.
But the warning signs in what swelled into a US$80bil corner of the municipal-bond market have been building up for years because the size of the annual payments under the 1998 agreement are based on cigarette shipments.
And those have been plunging, year after year, at a far faster pace than was expected when the bonds were sold, as Americans shun the habit or take up vaping instead.
New York’s Nassau County Tobacco Settlement Corp, the shell set up to issue so-called tobacco bonds for the Long Island county, was the first to snap.
At the start of this month, it was forced to skip a US$36mil payment on debt that was coming due because it didn’t have enough money, triggering a default.
The step accelerated what had been a sharp selloff in the county’s tobacco bonds and dragged down the price of similar securities by signaling increasing distress.
“If the cigarette market continues as it is with these last four years of near double-digit declines from the major tobacco firms, then we’ll see more of these structures hit events of default,” said Alliance-Bernstein analyst Matt Wackerman.
The rout has driven lower-rated tobacco- settlement securities to a 1.6% loss so far this month, a standout in fixed-income markets that have gained as movement toward ending the US-Iran war eases worries about inflation. — Bloomberg
