A couple of new tobacco regulations one on e-cigarettes and another on menthol cigarettes -- could impact consumption levels, the main driver of revenue for tobacco securitization bonds.
Cigarette consumption in the U.S. fell to 289 billion in 2012 from a peak of 640 billion in 1981, according to a Fitch Ratings report. Moody’s Investors Service projects a decline rate that falls in the 3% to 4% range during 2014.
The rate of decline could be higher ( Fitch said 5% or higher) if electronic cigarettes sales pick-up. E-cigarette consumption has pressured volumes of tobacco cigarettes by at least 1% throughout 2013, which has resulted in sales of $1.7 billion, according to Moody’s.
However new rules, for the currently unregulated product, could be nearing, according to Fitch. The ratings agency said it expects the FDA to soon come to a decision regarding the “safety and efficacy” of the products.
Fitch said in the report that the sales E-cigarettes could become subject to tobacco-related excise taxes, if regulators define the device as a tobacco product s and not a “smoking cessation medical device.” Current state and municipal rates for cigarettes average $1.53 per pack nationwide and peak at $5.85 per pack in New York.
“Heavy excise taxes could result in demand pressures on E-cigarettes by minimizing or eliminating the cost advantage over conventional cigarettes,” said Fitch analysts in the report.
Still Fitch believes that “in the distance future, sustained strong uptake of E-cigarettes and other smoking alternatives could effectively replace tobacco smoking.”
A possible ban on menthol-flavored cigarettes is also expected to come in the next two years. On Nov. 22, the FDA concluded its 60 day comment period for an advance notice of proposed rulemaking on menthol cigarettes.
Fitch said that rulemaking on the tobacco products in the US will likely be affected by the Dec. 2013 ban on flavored cigarettes implemented in the EU.
However a ban on flavored cigarettes would likely have a minimal impact on consumption levels. According to Moody’s, it is likely that existing menthol cigarette smokers would switch to non-menthol flavored brands and maintain their existing level of consumption.
“Any potential regulation of those cigarettes will have limited negative impact on tobacco settlement bonds,” said Moody’s. “New regulation will likely take years to take effect and would not affect tobacco consumption in 2014.
