More than $ 15 billion of municipal bonds, tobacco company payments in default for 30 years, Moody said. This does not deter investors from reaping the best gains in the free-tax market.
Tobacco bonds are rated below investment grade earned 17.1 per cent this year, according to Barclays Plc full refund of the indices. This compares with 4.8 percent for the remaining $ 3.7 trillion muni market.
The securities depend on the payment of the state in 1998 under medical settlement between 46 attorneys general and major tobacco companies. Investors are faced with a poor harvest in 1960 invested $ 4.7 billion this year in the high-yield municipal bond funds.
“A default does not mean that they will tend to zero,” said Daniel Solender, who helps manage $ 17 billion debt of ammunition, including about $ 500 million of tobacco bonds, the Lord Abbett & Co. in Jersey City, NJ. “There is demand for credit risks.”
Payments to the state to settle back to $ 101.2 billion of bonds, data compiled by Bloomberg show.
Speculative loans jumped from tobacco in 2010. Credit-rating cuts and the municipal market to sell local flooding caused by the sale of bonds and forecasts widely default led tobacco segment lost 22.1 percent this year, according to Barclays. In 2011, tobacco is highly profitable returns 23 percent.
Tobacco bonds are typically occurs 20 years or more, which makes their prices more sensitive to changes in yield than short-term problems. As a result, the securities have increased as outsize Fed purchases of long-term debt and lowered interest rates, as investors fled to the safety of Treasury bonds and munis.
“Tobacco has been battered sector and there was some good news,” said Tom Weil, director of municipal research at Barclays in New York. “The rally of the market, how many times you see the previous worst-performing sector has the most return.”
Cigarette-tempered with declining sales in 2009, when they fell by 9.2 percent, and in 2010, when they declined 6.4 percent, caused by 62-cents-a-pack federal tax increase in 2009, according to Jennie Montgomery Scott LLC of Philadelphia brokerage.
Tobacco bonds also received the support of two weeks ago; when U.S. President Barack Obama signed a bill that included a provision highway tax roll your own cigarette manufacturing machine at the same rates as they packed.
Contact the Ohio tobacco with 5.875 percent coupon maturing in 2047 traded on July 18 in an average of 78 cents on the dollar for a yield of 7.7 per cent tax. On January 4, the bonds traded at 70.3 cents with 8.5 per cent yield.
Tobacco bonds are eligible for an indefinite period on the income from the 1998 settlement, which was promised to back the bonds.
If the connection reaches maturity, and not enough money to pay the principal, the debt spreads, and investors are entitled to receive future income settlements, Dan Loughran, a portfolio manager with Oppenheimer Funds Inc, said at a conference of state and municipal finances took Link to Bloomberg in June.
The scenario “is very different risk than, say, credit risk, where you have unsecured debt, bankruptcy, and you’re looking at 10 cents on the dollar in the reconstruction,” he said at a conference in Chicago.
Last week, Moody’s forecast that nearly three-quarters of the $ 20.4 billion in bonds is a tobacco class by default, if cigarette consumption is reduced by 3 percent to 4 percent per year.
Tobacco bonds, which have a high debt ratio to the annual payments from the companies, long maturities and low cash reserves are vulnerable to a decline in smoking, Moody said. Moody rate of almost 80 percent of tobacco bonds B1, which is four levels below investment grade or below.
More recent numbers of tobacco were structured to withstand the reduction in consumption of up to 10 percent, and carry higher ratings. A bond maturing in 2037 issued by the Suffolk County, New York, in April, is traded on July 6 at the 4.7 percent yield. Bond rating of BBB + by Standard & Poor, its third lowest investment grade rating.
Richard Larkin, head of credit analysis at Herbert J. Sims, says the decline in consumption will be greater than 4 per cent increase in cigarette taxes and the growing anti-smoking regulations are adopted.
“Even if you have you can not smoke because it is mostly done illegally, anywhere,” Larkin, a smoker, said at the conference link. “Long-term downward trend, I do not think it would be better, it will be even worse.”
Companies seek reimbursement from the state on the grounds that the government is not careful observance of the statute relating to the small producers who were not part of the settlement.
More than 30 states and localities that have issued bonds with the support of the settlement of payments risk losing $ 1.1 billion, if the arbitrators decide that they do not fully enforce the agreement, said Larkin, who follows tobacco bonds Sims & Co, which is based in Iselin, New Jersey.
“Some states may take a real beating in terms of loss of future earnings in the settlement,” said Larkin. “I call it the roulette of cigarettes.”
Following are pending sales:
Maryland, with the top credit ratings, plans to sell about 728 million dollars from the general obligations as soon as next week, according to Fitch Ratings. The state plans to offer $ 75 million of tax bonds through a negotiated sale on July 27 and July 30 and $ 653 million for competitive sale on August 1, according to Fitch
Los Angeles Department of Water and Power plans to sell about $ 413 million revenue bonds, as soon as next week, according to data compiled by Bloomberg. Revenue will refund debt and fund capital improvements in accordance with the application proposal. Moody rates the debt Aa2, the third highest level. (Updated July 20)