When finance leaders gathered at the United Nations in New York to sign the Tobacco-Free Finance Pledge in September 2018, the move was billed as the first step to choking off finance to an industry responsible for more than seven million deaths a year. AXA, BNP Paribas, Natixis and the Ontario Teachers' Pension Plan were among 120 signatories that pledged to halt all support for tobacco companies. Covering US$6.4trn of assets under management and US$1.8trn of corporate lending, the pledge apparently packed a considerable punch. However, just over 16 months later, it seems to have had little effect. After a quiet year for financing in 2018, the five biggest tobacco companies substantially stepped up their fundraising last year, selling US$29bn of bonds – just short of the all-time record – and borrowing US$23bn in loans. While a handful of firms are turning their backs on tobacco, they are dramatically outnumbered by others more than willing to support the likes of Altria, British American Tobacco, Imperial Brands, Philip Morris International and Japan Tobacco, lured in by their record profits and strong financials. "There are still plenty of investors who look at tobacco," said Mark Wade, head of credit research at Allianz Global Investors, which excludes tobacco-related securities from its sustainable and responsible investment funds but allows such investments in its other funds. "Is it a predictable business? Yes. Does it generate high margins? Yes. Does it generate lots of free cashflows? Yes. Does it have attractive shareholder returns? Yes. There's a lot to like about tobacco other than the fact that it makes tobacco." US$48BN OF DEMAND Big deals from Altria show just what is possible. JP Morgan lent the company US$14.6bn last January to fund its purchase of e-cigarette maker Juul Labs. When Altria turned to US bond markets to take down the loan a month later, it was met with US$48bn of demand, allowing it to upsize the deal. But while the headline numbers indicate continued access to capital, bankers say that the Tobacco-Free Finance Pledge has had some impact – below the surface. "If you look at geographic distribution of deals, it looked pretty normal a few years back," said one banker who has worked closely on several recent tobacco transactions. "But now investors from France, the Netherlands and Scandinavia are all out. The people buying are funds from the UK, the US and Asia." He said that tobacco clients have noticed a drop-off in demand from some investors and have adapted in response – issuing more in US dollars and curtailing marketing in Europe. For now that drop-off hasn't had a major impact on pricing, but tobacco companies are nonetheless worried about the future. "They are facing up to it, for sure," the banker said. "I had a worried email from one of our clients just the other day. They see their investors changing and want to know what to do to minimise the impact. It is no coincidence that there haven't been many big tobacco deals in euros over the last few years. "At this point it's a pricing discussion, it's not a 'can we/can't we?'. But if one of these clients came along with big financing needs, I would question how much of that we could get done in euros. Can you do multiple billions in the currency? Honestly, I think no. And that is a worrying comment." At a time when other corporates are increasing euro issuance to take advantage of low borrowing costs, an enforced skew towards US dollars certainly puts tobacco outfits at a disadvantage - albeit a slight one for the moment - relative to other borrowers. And that matters because some have significant refinancing needs after a run of big acquisitions. BAT alone has £10bn of maturities in the next three years, for example. GIVING UP "When it comes to tobacco, we don't believe there's any safe level of consumption and therefore exclude any tobacco companies from investment," said Paul Brain, a fund manager at Newton In
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