March 28, 2020 – Based on two separate articles published today and on March 27, the Buffalo Chronicle reported that New York State Governor Andrew Cuomo is rolling out a six-week ban on the sale of combustible cigarettes as part of an effort to reduce COVID-19 related respiratory complications.
Many health professionals including doctors in Italy have hypothesized that smoking prevalence is positively correlated with poorer outcomes for COVID-19 patients. The three nations with the most COVID-19 deaths – Italy, Spain and China – all have high smoking prevalence, with about 30% of Italian and Spanish males smoking and over 45% of Chinese males
According to the Buffalo Chronicle:
Dr. Howard Zucker, the Commissioner of Health, is prodding Cuomo to issue the temporary ban and discussed the issue with him privately earlier this week. Zucker has long advocated for additional restrictions on combustible cigarette sales, which causes more than 443,000 deaths annually — more deaths each year than from murder, car accidents, alcohol or drug use, suicides, and HIV combined.
Any efforts whether in New York or in other states to curtail smoking could severely impact an esoteric sector within the municipal bond industry known as “tobacco securitization”.
“Tobacco bonds” issuance has an unsavory history, with municipalities pledging revenues received from Big Tobacco companies as a result of a 1998 settlement to bond holders. Twenty years ago when states and localities had lower ratings than today, tobacco bonds provided a method to receive upfront revenues without contravening debt limits and indenture constraints. The ethics of such bonds – with states and localities having a vested interest for smoking to persists, so that bondholders will be repaid in full – have always been controversial.
Over time, the tobacco bonds industry has grown to an estimated $85 billion, and is one of the most active sub-sector within the municipal “high yield” sector that has seen eye-popping returns of over 15% during recent years where municipal bonds have rallied.
The Governor and his health czars were probably unaware that these aberrant municipal bonds even existed. We are likely to see the tobacco bonds trade down (in price) as investors reduce risks.
But the tobacco bond bankers and legal advisors – who have made hundreds of millions in fees over the past two decades – were one step ahead. Under most tobacco bond security pledges, MSA revenues (paid by Big Tobacco) will simply flow to bondholders until the bonds are ultimately repaid. During a low interest rate environment such as today, bondholders are unlikely to complain about juicy 5-7% coupons, even if they need to wait a bit longer to receive their principal.
The house, as they say, always wins.
Contact Karen Bigelow at KBigelow@buymuni.com.
