12th November 2018

British American Tobacco, the FTSE listed Tobacco company’s bonds and stocks have traded down today (12 Nov-18) due to a press article discussing a potential FDA ban on menthol cigarettes.  Menthols last year represented 55% of BAT’s U.S. cigarette sales by volume (Source: WSJ), which makes any potential new regulation in this area a material risk for BAT. However, this is nothing new, the direction of travel for many years in developed economies has been increased regulatory intervention and increasingly punitive taxes on Cigarette consumption. Our base case has been that these moves will very likely continue.

In this context, we questioned the investment case of buying into BAT’s low coupon, long dated issuance as a “defensive” fixed income investment, even before we consider the likely trend towards ESG investing which largely prohibits investment in the sector.

This is not the only major headwind that BAT’s bond investors have had to face:

• Rising leverage after the $25bn acquisition of Reynolds American
• Increased litigation risk, resulting from cases which Reynolds had outstanding
• Increasing E-Cigarette sales from competitors

Unfavourable business trends and regulatory developments could lead to further credit ratings drift, which could have implications for its high-grade holder base.

BAT issued €600m Euro bonds in March 2015 (BATS 2% 2045) and £650m of GBP bonds in September 2016 (BATS 2.25% 2052).  We have closely followed these bonds as we view them as “poster-childs” of the excesses of the QE-Era, when issuers were able to lock in ultra-low coupons on long dated debt.

At the time of writing, the aforementioned bonds are indicated as set out below:-

Source: BBG, as at 11:45am BST on 12 Nov, indications only.

As illustrated above, investors who bought into this bond in the primary are now sitting on significant capital losses, that are unlikely to be compensated by the low coupons attached to both issues.

For more information please contact Rubrics Asset Management. info@rubricsam.com.

Important Investment Information The views above are published solely for information purposes and are not to be construed as a solicitation or an offer to buy or sell any securities, or related financial instruments. It does not constitute advice or a personal recommendation as defined by the Financial Conduct Authority (“FCA”) or take into account the particular investment objectives, financial situations or needs of individual investors. The views above are based on public information and sources considered reliable. Past performance is not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments can fall as well as rise, therefore you could get back less than you invest. If you are unsure about the appropriateness of an investment for your circumstances please seek independent financial advice. Investors should form their own view on any proposed investment. This publication has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Figures correct as at 12 November 2018 unless otherwise stated. This publication is issued by Rubrics Asset Management, an appointed representative of Shard Capital Partners, 20 Fenchurch Street, London, EC3M 3BY United Kingdom who are authorised and regulated by the Financial Conduct Authority. For South African investors: In the Republic of South Africa this fund is registered with the Financial Services Board and may be distributed to members of the public. In addition to the other information and warnings in this document, the Financial Services Board of South Africa requires us to tell South African recipients of this document that collective investment schemes are generally medium to long-term investments, collective investment schemes are traded at ruling prices and can engage in borrowing and scrip lending and that a schedule of fees and charges and maximum commissions is available on request from the manager. Because foreign securities are included in the investments within this collective investment scheme, we are also required to disclose to you that there may be additional risks that arise because of events in different jurisdictions: these may include, but are not limited to potential constraints on liquidity and the repatriation of funds; macroeconomic risks; political risks; foreign exchange risks; tax risks; settlement risks and potential limitations on the availability of market information. Additional Information for Switzerland: The prospectus and the Key Investor Information Documents for Switzerland, the articles of association, the annual and semi-annual report in French, and further information can be obtained free of charge from the representative in Switzerland: Carnegie Fund Services S.A.,11, rue du Général-Dufour, CH-1204 Geneva, Switzerland, tel.:+41227051178, fax:+41227051179, web: www.carnegie-fund-services.ch. The Swiss paying agent is: Banque Cantonale de Genève, 17, quai de l’Ile, CH-1204 Geneva. The last share prices can be found on www.fundinfo.com. For the shares of the Funds distributed to non-qualified investors in and from Switzerland and for the shares of the Funds distributed to qualified investors in Switzerland, the place of performance is Geneva.