(Newswire.net — June 25, 2014) St. Petersburg, FL. — In 1998 there was a legal agreement made between the tobacco companies and the United States to settle lawsuits. This agreement would settle lawsuits by providing payments that would offset the rising costs incurred from medical care of smokers. These payments made by the tobacco companies to the United States were based on shipments of cigarettes.
e Cigarettes are creating a major risk to these payments, because people are using the e cigs as an alternative to smoking. Reuters reported that “Cigarette consumption has dropped an annual average 3.4 percent since 2000 while many bonds were structured to withstand consumption declines of only 2 to 3 percent.”
This gets really interesting considering that the Wall Street Journal stated “Some states and municipalities from New Jersey to California sold tax-exempt bonds backed by that money, including many zero-coupon bonds that don’t pay interest until maturity. The settlement was reached long before the existence of e-cigarettes, which aren’t included in any payments.”
Analysts had already forecasted that tobacco bonds would begin to default over the next decade because of the faster than forecasted rate that smoking Americans are kicking the habit. Now that e Cigarettes are beginning to move mainstream, Americans are using them as an alternative and dumping traditional cigarettes at an even faster rate.
“If the decline goes to 6 or 7 percent, it will be very quick,” said Tom Metzold, portfolio manager at Eaton Vance Investment Managers. “I think that the first ones are probably five years away,” he said in reference to defaults.
e Cigarettes have only taken a small segment of the traditional cigarette market, even though they have grown from almost non-existent just 4 years ago to over $2.2 billion currently in market share. Many forecasters have publicly stated that the e cigs could have a larger market share within a decade than the current $78 billion that traditional cigarettes have.
This brings rise to the question on whether the $78 billion cigarette market share, and the $96 billion in tobacco bonds have anything to do with all the uproar over e cigarettes lately. Is this enough of a reason for tobacco companies to try to get e cigs banned altogether?
Maybe the tobacco companies will just come in and buy out the e cigarette companies so they will still own the market. With this much money at stake, and the possibility of it affecting so many states there will most definitely be repercussions.
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