Municipal Bond Forum

Home > Municipal Bond Forum > Tobacco > Tobacco consumption cont’d #2

Q

If tobacco bond indentures include covenants that would sanction changes in their payment obligations if the MSA were modified, is it conceivable that government tobacco bond issuers might try to minimize payouts to better reflect tobacco firms’ reduced MSA payments? Would such bond indenture changes withstand legal challenges?

A

James A. Klotz responds:

To the best of our knowledge, such covenants do not exist. It would be difficult for an issuer to sell such bonds in the first place if they had the ability to change their agreed-upon payments to the bondholder due to changes in MSA payments. A table showing expected coverages of annual debt service payments by pledged revenues is included in each Official Statement and bondholders can use this table as one factor in evaluating whether they believe such an investment is creditworthy. This is no different than any other revenue bond where future revenue streams are estimated and coverages are provided from such potential revenues. It is up to the bond purchaser, in all bond issues, to determine whether he/she believes the projections are realistic. Bond covenants do not change in response to a potential reduction in the collateral securing the bond.