The go-to dealmaker in the market for tobacco bonds is gone from her post – a surprise departure that raises questions about the future direction of a once-burgeoning corner of Wall Street.
Kym S. Arnone, a senior banker who, by her own count, helped engineer more than $40 billion of tobacco bond deals, is no longer with Barclays Capital, a bank spokesman confirmed last week.
The reasons for Arnone’s departure are unclear. Some clients contacted by Barclays said they had been told the separation was “mutually agreeable” but not whether Arnone was joining a competitor. Bankers at competing firms also told ProPublica they were not aware if she had been hired elsewhere. Arnone did not respond to calls and emails, and the Barclays spokesman would not provide details.
Tobacco bonds had been a hot segment of the $3.6 trillion market for municipal government debt. A 1998 legal settlement with cigarette manufacturers created demand for bonds, which netted upfront cash for state and local governments that were promised billions of dollars in future payments to compensate them for health-related costs of smoking.
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As ProPublica reported, tobacco bonds were a booming business from 2005 to 2008, when bankers like Arnone persuaded dozens of settlement recipients to borrow against their cut of the accord, sometimes for pennies on the dollar. These days, few new deals are coming to market. The most recent, a $750 million Louisiana transaction we wrote about in April, failed to get state legislators’ approval.
Instead, governments have been retooling past tobacco bond issues that are heading for default thanks to bankers’ use of a risky form of borrowing known as capital appreciation bonds, or CABs. These bonds typically carry higher interest rates and require big balloon payments, often decades in the future.
Last year, Arnone engineered a bailout of two such bonds sold by New Jersey. As we reported, a hedge fund cleared a $100 million profit on its holdings of the rescued bonds, which were expected to default.
New Jersey officials said the rescue was a good deal for taxpayers even though the state had to pledge about $400 million more of its future tobacco settlement money to prop up the bonds. They were part of a larger tobacco bond issue that Arnone handled for the state back in 2007.
Since October 2014, Arnone has served as chair of the Municipal Securities Rulemaking Board, the industry’s self-regulator. A spokeswoman for the MSRB said Arnone would continue to serve out her term as chair of the MSRB’s board until her term expires on Sept. 30. As chair, Arnone is paid $80,000.