Municipal Bond Forum

Home > Municipal Bond Forum > Tobacco > Creditworthiness of tobacco bonds

Q

Do you know the creditworthiness of various state tobacco bonds, and which ones, from a risk/return standpoint, offer the best relative value? Also, I am a Massachusetts resident, so could you provide any information on the tobacco bonds of Massachusetts?

A

James A. Klotz responds:

Massachusetts has not issued tobacco bonds and, as far as we know, has no plans to do so.

In response to any question regarding relative value, we point to the credit underpinnings of these bonds. Tobacco bonds, as a class, are secured by payments made under the Master Settlement Agreement to participating states and territories. The amount each state receives each year is based on a pre-determined formula that is applied against the total dollar payment received from the tobacco industry. This payout each year is based upon domestic shipments of cigarettes.

Treated as a class, tobacco bonds carry credit ratings based generally on the rating agencies’ assessments of the credit quality of the tobacco industry.

The same projections of smoking trends and their effect on MSA payments are used for each bond issue. Distinguishing characteristics between tobacco bond issues are few, but can encompass annual coverage projections and some aspects of structuring. Overall, these issues are structured similarly and are generally rated in the BBB/BB rating categories.

We do not have separate research available on relative value, but a search of our Web site will provide numerous commentaries on the benefits and challenges presented by this category of securities. You may also want to contact the rating agencies for any reports they have issued.