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March 27, 2015

A New Flavor of Tobacco Bonds – WSJ 2012

I’ve posted this article because it illustrates what States are facing now: Debt from Big Tobacco. The compensation to States comes in yearly, relying on tax on tobacco products.

As fewer smokers in the US is the trend, those States that borrowed on future revenue are in big trouble.

Now you know why the big freakout by a variety of government and non-government agencies are panicking. It’s their bread and butter, so as the $$ decreases, so does their share.

 

[excerpt]

Tobacco bonds’ revenue streams depend on total U.S. cigarette sales. If sales fall, less money is doled out in a set proportion to each state. But Alabama used ultraconservative assumptions for its bonds. The securities will default only if cigarette sales in the U.S. fall more than 25% each year until the debt matures.Many tobacco bonds were issued under the assumption that sales would decline about 2% a year. The decline last year was 3.5%, to 293 billion cigarettes, following a decrease of 3.8% in 2010 and 8.6% in 2009, according to Management Science Associates, an industry research group.

via A New Flavor of Tobacco Bonds – WSJ.

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