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.