An increase in E-cigarette use would further reduce cashflows to tobacco settlement securitization bonds and negatively impact their ratings , according to Fitch Ratings.
E-cigarettes have been gaining popularity in recent years as a smoking cessation method. Consumption is expected to grow 40%-50% in the coming year. Sales for the product are projected to pass traditional cigarette sales by 2047, according to data reported by Bloomberg Industries.
At such a level of reduction, Fitch’s ratings on tobacco settlement ABS ratings would be negatively impacted. The ratings agency calculates cashflows to tobacco bonds based on inflation and the amount of traditional tobacco products shipped within the U.S. E-cigarettes and smokeless tobacco products are excluded from the shipment amount.
“Any sizable shift in consumer behavior away from traditional tobacco products in favor of e-cigarettes could lead to a decline in traditional tobacco shipments and thus reduce the Master Settlement Agreement payments received by tobacco settlements trusts,” explained Fitch.
In recent years, smoking declines that have happened at a rate of 4% per year, have already pressured the performance of tobacco settlement ABS bonds because legacy bonds were structured as if declines would happen at 2% per year.
“High shipment declines due to the increases in the federal excise tax and some state taxes have put stress on the cash flows to tobacco settlement bonds, and we would expect a shift in market share to further exacerbate the strain on the payment streams,” said Fitch.