>Sustained Decline in Cigarette Consumption Rates Will Cause Many Tobacco Settlement Bonds to Default

Declining rates of cigarette consumption in the US pose a major credit risk to tobacco settlement bonds. In this report we present consumption break-even decline rates that quantify this risk. Consumption break-evens estimate the rate of decline in cigarette consumption that would lead to default for each tobacco settlement bond we rate. The break-even cigarette consumption decline rates for each rated bond also show that under our projection of an annual decline rate range of 3%-4%,1 bonds constituting 74% of the aggregate outstanding balance of all tobacco bonds we rate will default.2 This finding is consistent with the bonds’ current ratings, 79% of which are B1 or lower. The factors leading to low break-even rates are high leverage ratios, long bond maturity, and low cash reserves.


Break-even analysis determines maximum consumption decline before a bond suffers payment default We calculated the break-evens for cigarette consumption decline rates by conducting iterative cash flow analyses to determine the default threshold for each rated bond, holding all other inputs constant. The default threshold is the highest constant annual decline rate for cigarette consumption at which each bond fully amortizes by its final maturity date without a payment default.


As illustrated in Chart I, our break-even analysis finds that 15 tranches representing 33% of the rated bond balance have a consumption break-even of 2%-3%, while 25 tranches representing 41% of the aggregate rated bond balance have a consumption break-even annual decline rate in the range of 3% to 4%. All of these bonds would default if the average annual consumption decline occurs at the high end of that range. This analysis assumes a constant rate of decline for the duration of the bonds’ life.


To read report in detail: CIGARETTE CONSUMPTION

A DECLINING RUPEE HURTS SOME INDIAN COMPANIES MORE THAN OTHERS (MOODY'S)

State-Run Indian Oil Corporation (IOC) at Most Risk If Gov’t Subsidies Fall Short

Adverse impact of weaker currency varies for issuers. The severity of the weakening Indian rupee (INR) on Indian corporate issuers ranges from high but potentially recoverable for Indian Oil Corporation (IOC, Baa3 stable) to low for regulated utilities and export-oriented companies, which benefit, respectively, from an automatic pass-through of higher costs and from exports that have now become more competitively priced. For others, such as the Tata Group companies, offshore operations may accentuate or mitigate the impact of a depreciated local currency.

India’s dependence on energy imports raises credit risk for oil marketers. Depreciating local currencies can help export-oriented emerging markets. However, India’s persistently high inflation and dependence on energy imports of oil, gas, and increasingly coal, provide limited leeway for its regulated, import-dependent sectors to cope with higher import bills caused by a weakened currency. A failure by the Indian government to fully compensate such rising costs at state-owned IOC would put the oil-marketing company’s finances at risk.

Ratio of net imports/EBITDA is more damaging than share of forex debt to total. At 8x, IOC stands out as having by far the highest ratio of net imports to EBITDA of all rated issuers, which makes the company vulnerable to a declining local currency by magnifying its impact on profitability. Exposure to debt denominated in foreign exchange (forex) does not have a similar, magnifying effect on debt or interest costs.

Most forex bond debt for Indian corporate issuers does not come due until 2014 or later. Eleven major issuers have little near-term exposure to maturing forex bonds. However, some issuers, including IOC, will need to refinance their short term foreign currency bank debt in the next 12 months, which may get challenging if Europe’s credit crunch reaches Asia and causes spreads to widen or curtails lending.

To read full report: DECLINING RUPEE

RISH TRADER