Could tobacco bonds fuel political resistance to the e-cigarette?

The following guest post comes to us from Mark.  All opinions are those of the author. Close cover before striking.

stocks and bondsFor some time now experts have been scratching their heads and wondering why there is so much political resistance to the electronic cigarette industry. This is an industry which could significantly reduce tobacco related deaths, has been proven to be far less harmful than tobacco cigarettes and, in the words of some experts, is the best chance we will ever have to reduce tobacco addiction. So, are there any factors behind the scenes which could be influencing the political debate about electronic cigarettes?

One issue which has arisen over the last few weeks is that of tobacco bonds which were effectively created on the back of the 1998 Master Settlement Agreement between 46 US states and large tobacco companies operating in the US. This agreement was ratified as a means of compensating the 46 states for what was seen as additional healthcare costs directly associated with the smoking of tobacco cigarettes. So, why should we be concerned about tobacco bonds and the electronic cigarette industry?

How are these tobacco bonds structured?

While the original 1998 settlement saw the 46 US states in question set to receive annual compensation payments based upon tobacco sales, some states decided they would rather have the bulk of their money up front. As a consequence, something which is an everyday occurrence in the financial markets, these future interest payments were effectively consolidated and used as backing for the so-called tobacco bonds. In effect, the states sold IOUs to investors using future income streams from the compensation arrangement with tobacco companies as collateral.

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The bonds themselves were structured in such a way as to be able to handle a reduction in tobacco sales of between 2% and 3% per annum. If you cast your mind back to 1998, e-cigarettes did not exist and couldn’t possible be considered as a threat to tobacco. However, tobacco sales have reduced by an average of 3.4% per annum since 2000, it does start to get a little worrying for the states that decided to take their money up front.

Is there a problem?

The simple fact is there is a direct correlation between tobacco sales and the level of annual compensation paid to the US states in question. So, with many experts predicting significant growth in electronic cigarette sales, the already damaging figure of a 3.4% average decline in tobacco sales could rise significantly. There is already evidence that some states are now being forced to dip into their financial reserves to fund interest payment shortfalls on the $96 billion worth of bonds which are still outstanding.

The situation will only get worse in the short to medium term because eventually these bonds will be redeemed while year by year tobacco sales continue to fall and electronic cigarette sales continue to rise. Some experts have predicted that tobacco cigarette sales could fall by between 6% and 7% per annum in the short to medium term, forcing financial experts to speculate that some of the tobacco bonds in question could default on interest payments. Any default on these bonds, which were introduced by the various states, could impact the credit rating of the individual states, leading to a higher cost of finance in the future.

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Is this crystallizing the political resistance to electronic cigarettes?

Some experts had predicted a potential default by the first tobacco bonds within 10 years although with the growing demand for electronic cigarettes some have reduced this timescale to between five and 10 years. There is obviously significant financial pressure on various US states. In theory if they could reclassify electronic cigarettes under the current tobacco regulations, could electronic cigarette sales fall under the guise of the 1998 legal compensation arrangement?

If this reclassification of electronic cigarettes saw sales fall under the compensation arrangement then this would lead to an increase in compensation payments, reduce financial pressure on various US states and alleviate possible default on some of the tobacco bonds. It will be interesting to see how this particular situation pans out, whether the doomsday scenario emerges or whether we see a flattening of growth in electronic cigarette sales and a return to financial stability for the tobacco bonds.

Conclusion

In theory it may be possible for various US states to reclassify electronic cigarettes and bring them under the guise of the 1998 compensation agreement with the US tobacco companies. Whether or not this is a factor that the politicians are taking into consideration is debatable because we also need to remember they have an obligation to protect the health of the general public. We are certain to hear more about the tobacco bond situation in the short, medium and longer term and indeed now it is receiving more coverage in the press, how will politicians respond?

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For further information about electronic cigarettes please visit the OKCigs.co.uk website.