LOS ANGELES — California's tax increase on cigarettes is credit negative for tobacco bonds, according to Moody's Investors Service.
The $2-per-pack increase boosts the cost for California smokers by 35%, which Moody's said will decrease cigarette consumption across the country because California comprises 10% of total U.S. cigarette consumption.
Tobacco bonds are backed by payments from tobacco manufacturers from the Master Settlement Agreement between various states and the manufacturers. The payments are based on cigarette consumption.
The tax increase could cause a 50 basis point decline to nationwide consumption, if a decline in consumption is similar to what happened in 2009 when the federal government raised the excise tax on cigarettes by 60 cents, Moody's said.
"The payments that service tobacco bonds under the MSA are based in part on cigarette shipment volumes, which track consumption over time," Moody's analysts wrote. "Thus, any declines in consumption will have the effect of reducing the cash flow available to service tobacco bonds and resul tin bonds paying down more slowly than originally anticipated."