Monthly Archives: June 2013

Ratings Rationale in Tobacco Industry

Standard and Poor’s rates the securities maturing in 2016 through 2023 A, or five steps below top grade; those due in 2024 through 2033 A-, one level lower; and the 2035 maturity BBB+. The ratings reflect the likelihood of timely payments, tobacco company credit quality, the deal’s structure and the presence of about $57.3 million in a liquidity reserve account, S&P said.

The 1998 accord that 46 states struck with Phillip Morris USA (PM), Reynolds American Inc. (RAI) and Lorillard Inc. (LO) required the companies to pay more than $200 billion to resolve their liability in litigation over health costs related to smoking cheap cigarettes. About $101 billion of municipal debt is backed by the payments, which are based on cigarette shipments.

Tobacco munis produced a 0.48 percent year-to-date total return through June 20, compared with a 2.13 percent loss for the broad muni market, according to Barclays Capital indexes.

A Louisiana tobacco bond maturing in May 2039 traded June 21 at an average yield of 5.88 percent, with the spread averaging 2.16 percentage points over benchmark munis of the same maturity, according to data compiled by Bloomberg. On Jan. 2, the tobacco bond had an average yield of 3.73 percent, a risk premium of 1.03 percentage points.

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Posted by on June 25, 2013 in Tobacco Facts


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Cigarette affordability key to controlling tobacco addiction

Despite annual rises in tobacco duties, smoking continues to increase due to its affordability and weak control over cigarette advertising.

A report from the Southeast Asia Tobacco Control Alliance (SEATCA) found that cigarettes have become cheaper in relation to the rise in individual incomes in six Southeast Asian countries, which have seen gross domestic products (GDP) continue to grow.

The report found that the Relative Income Price (RIP), the percentage of per capita GDP required to purchase 100 packs of cigarettes in Indonesia, stood at 0.06 percent in 2001. The figure decreased to 0.03 percent in 2010, reflecting the increased affordability of cigarettes.

“The RIP steadily decreased over the past ten years because the six countries are developing rapidly and have high growth rates in terms of GDP and population income,” Sophapan Ratanachena of SEATCA said in a press conference on Monday.

“For Indonesia it is extremely low, the percentage is below 1 percent,” she added.

Other countries in the region have much higher RIP ratios than that of Indonesia.

The RIP for average-price cigarette in Laos, for example, stood at 4.67 percent in 2010. The RIP for the most popular medium-priced brand of cigarettes in the Philippines stood at almost 3 percent in 2009.

The Finance Ministry raised the duty on cigarettes by 8.5 percent in 2013. The duty increase in 2012 was 15.5 percent compared to the year earlier, yet cigarette production is rising every year.

Abdillah Ahsan, a researcher from the Demography Institute at the University of Indonesia said that the continued rising trend in the consumption of cigarettes. He said that in 2009, Indonesia consumed 251 billion cigarettes. The number increased to 302 billion in 2012.

Abdillah added that there was currently only 46 percent tax on the retail price of cigarettes, which was much lower than in neighboring countries.

Thailand, for instance, has 70 percent tax on the retail price, Singapore 69 percent and Brunei 67 percent, followed by Philippines with 53 percent.

“Indonesia should increase the tax on cigarettes up to 80 percent, just like the tax on alcohol,” Abdillah said.

Sophapan said the government should raise tobacco taxes immediately to reduce tobacco affordability.

“When the government increases the cigarette tax, it should ensure that the increase affects all types of cigarettes,” she said.

She said that an increase in tax on all types of tobacco products would make it impossible for smokers to switch from factory-produced cigarettes to hand-rolled ones, which are much cheaper.

Ulysses Dorotheo, the project director of the Southeast Asia Initiative on Tobacco Tax of SEATCA, said that as long as the industry passed on the additional tax to consumers, increasing tobacco excise would not adversely impact on the industry’s profit margins.

“The increase in excise will significantly increase tax revenues, while at the same time reducing tobacco consumption,” Ulysses said.

Indonesia had maintained its increase in smoking prevalence, he said, because of the weakest cigarette regulation compared to other countries in the region such as Hong Kong and Singapore.

In those two countries, consumption is quite low because they already have bans on public smoking, require pictorial warnings on cigarette packages and have higher taxes.

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Posted by on June 21, 2013 in Tobacco Facts


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Price of cigarettes in Russia to jump 50% next year

The Russian Ministry of Finance plans to raise tax on tobacco by 50% to bring it closer to European levels. The World Health Organization has suggested Russia needs a seven-fold increase by 2020.

The draft legislation is to be presented to the government on June 20, Izvestia daily reports.

Excise duty on filter cigarettes will be raised to 820 roubles ($25)  per thousand cigarettes from 550 roubles ($17). The hike will increase the retail price of cigarettes by 50% to an average $3 per pack, the paper calculates.

The excise tax on alcoholic beverages also will increase, the paper reports. It will go up from 9% to 25% on spirits, 14%  on wine, and 4% on champagne.

The duties will be raised to equalize taxation of tobacco products with other European countries, the paper reports.
The fight against smoking is the second reason for the increase. If the price is increased, children, adolescents and the poor will either smoke less or move to low-quality tobacco, the paper reports.

In the US, President Barack Obama has proposed to nearly double federal excise taxes to $1.95 on each pack of cigarettes to compensate for the recent drops in revenue paid to state governments that back tobacco-settlement bonds, Reuters reports. A proposed tax increase would boost an average pack price to nearly $7 in the US, the agency calculates.

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Posted by on June 21, 2013 in Tobacco News


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