NEW YORK: More than two decades after Wall Street started pumping out a new type of bonds – those backed by the legal-settlement payments governments receive from cigarette companies – one batch has finally been driven into a default.
It almost certainly won’t be the last.
The securities allowed state and local governments to get the cash upfront by selling debt that’s repaid, gradually, when the proceeds roll in. That offloaded all the risk to investors, who were compensated with high yields in return.
But the warning signs in what swelled into a US$80bil corner of the municipal-bond market have been building up for years because the size of the annual payments under the 1998 agreement are based on cigarette shipments.
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