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I imagine Chicago’s plan to increase cigarette taxes, which you discussed in your article, “Clouds Darkening for Tobacco Bonds,” will cause problems for Illinois tobacco bonds. I purchased Erie, New York, tobacco bonds, rated BBB/BBB+, first tranche taxable. The maturity date is 2028 but they pay faster as all principal reductions for the bond issue go to the first tranche. Are you concerned about these types of bonds?
- S.Y., Maryland
Under the Master Settlement Agreement, the amount of revenue due from tobacco companies is based on general cigarette sales throughout the United States. Any regional impact would result from the particular structure of the bonds issued by the individual states.
Your Erie County bonds are refunding securities issued in 2005 and, as you say, still maintain investment grade ratings by both Moody's and Standard and Poor’s. Their "turbo" structure has provided for the rapid pay-down to which you refer. We are quite comfortable with this issue.
The intent of our commentary was to alert investors with medium or low risk tolerance that many tobacco securities purchased as "investment grade" are now rated below this standard.
I need a means of measuring the likelihood of problems with Puerto Rico bonds. A power and light company generally sounds OK as long as consumers can pay their bills. But would hard times in Puerto Rico be that much different than hard times here in the states?
- R.S. New Jersey
In the Standard & Poor's report we highlighted in our recent commentary, “Herd Mentality Yields Unique Value,” the rating agency attempts to do exactly what you are requesting: provide a means of measuring the ability of insurers to meet their responsibilities if payment problems develop with Puerto Rico bonds.
To this end, S&P assumes a worst-case scenario in its attempt to gauge the viability of the insurers, even if the economy experiences symptoms similar to those of the Great Depression in the 1930s. We took this to be a very conservative assumption.
Naturally, all investments contain a degree of risk and there obviously are no guarantees.
Everybody is dumping Puerto Rico bonds because 13.5% unemployment is so high. Thus, people are moving out of Puerto Rico and it is declining in population. Don't you think this could be dangerous for investors?
- L.B., California
Of course we do. We have made this clear in a number of our articles and commentaries.
Our article, “Herd Mentality Yields Unique Value,” pertained to a positive report by Standard & Poor’s regarding two of the insurance companies and their ability to pay investors if a worst-case scenario for Puerto Rico did unfold.
Perspective is important. Often, unfavorable news leads many investors to panic and “throw the baby out with the bathwater,” which in turn creates opportunities for those who do their homework.
This report is produced solely for informational purposes and is not to be construed as a solicitation or an offer to buy or sell any securities or related financial instruments. This report is based on information obtained from sources believed to be reliable but no independent verification has been made, nor is its accuracy or completeness guaranteed.