Analysis of Tobacco Revenue Settlement Bonds

Abstract

Tobacco settlement revenue (TSR) bonds have developed quickly as a major, higher-yielding municipal bond sector. These securities derive their required debt-service revenues from cigarette manufacturers, under provisions embedded in the Tobacco Master Settlement Agreement. This article describes a methodology on the narrow but crucial topic of assessing cigarette consumption decline estimates, which is very important to the bond security. The research approach is to assess cigarette-smoking trends, via data sources apart from TSR bond official statements, and offer the results, as one among several tools, for analyzing the TSR bonds. The principal conclusion, based on the research methodology described in this article, is that the long-term cigarette smoking decline rate might be significantly steeper than the rate that has been assumed within typical TSR bond structures.