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Q

Why does your firm continue to sell tobacco bonds, which you expect will go belly up?

A

James A. Klotz responds:

Moody’s had taken certain actions based on its reassessment of the credit of certain securities; we initially wrote about it as part of our responsibility to alert tobacco bondholders of those actions. As a successful bond investor, you are well aware that bonds are long term in nature and underlying fundamentals can change over time.

Nowhere in any article on our Web site do we suggest that we expect any of these bonds to go “belly up.” We are simply reflecting that the rating services, which originally awarded certain tobacco bonds “investment grade” ratings, now consider them to be only suitable for investors – such as you – who have speculation as one of their investment objectives. We have a considerable number of clients who fall into this category, and we continue to accommodate their interests as well.

To reiterate, our purpose in writing about this change in status is to alert investors who have more conservative investment objectives and bought these bonds when they were rated in the “investment grade” category. The last two paragraphs of our recent article (“More Concern Over Tobacco Bonds”) specifically summarize our position:

“As a result of the overall strength of the municipal bond market, many tobacco bonds still command prices that belie their ‘speculative, below investment grade’ ratings.

“If you didn’t exchange these bonds when they were originally downgraded and speculation is still not part of your investment objectives, we reiterate our suggestion to either sell or lighten up your tobacco bond holdings.”