Tobacco Settlement Bonds: A Look At The Effect Of Securitization on the Credit of Sttates Using Capital Appreciation Bonds

Tobacco Settlement bonds have been issued by several states to obtain early use of funds awarded to them in the Tobacco Master Settlement Agreement (MSA) of 1998. The MSA awarded monies in perpetuity to states to settle claims and lawsuits against the tobacco industry that had been ongoing for over a decade. Nine states, and Washington, DC, Puerto Rico, and Guam, have chosen to cash in on future MSA payments by issuing capital appreciation bonds in order to receive funds immediately and postpone any type of repayment for 55 years. This paper critically analyzes how using capital appreciation bonds backed by diminishing future MSA revenue streams will inevitably lead to default and higher borrowing costs in all bonds for these states and territories.