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No Smoke Without Fire

12 November 2018 by jbchevrel

Today British American Tobacco Plc (BATSLN) has widened by c25bp, taking its 5y CDS spread from c75bp to c100bp. At first sight it looks like a big move on such a tight name. It happened after a senior US Food and Drug Administration (FDA) official said the agency is looking at restricting menthol in cigarettes. The regulator hopes to hit youth smoking by banning/restricting flavors in cigarettes. BATSLN was impacted because it produces Newport, the best-selling brand of menthol cigarettes in the US. Menthol cigarettes represent approximately ¼ of BATSLN profit, making it the most vulnerable group to that potential regulatory move. That explains the +25bp on the CDS / -11% on the stock. The higher leverage (now ~3.7x) since the 2017 merger (with RAI – Reynolds American Inc) adds to valid reasons why investors are more cautious on the name, going forward. Elsewhere it was a reasonably active session despite the US being out on Veterans Day. A typical risk-off day which saw CDS indices widen, stocks fall, govies richen and the US dollar rise vs all other G10s.