The New York State Tobacco Settlement Financing Corp. next week will sell $975.5 million of tobacco refinancing bonds to generate savings.
Barclays Capital will price the Series 2011A and B asset-backed revenue bonds on Wednesday following a one-day retail order period.
The state has contracted the annual payments it receives from tobacco companies under a master settlement agreement to the corporation, with those allocations subject to legislative appropriation. Fitch Ratings and Standard & Poor’s view the credit as based on the state’s double-A credit ratings.
The Series 2011A and B bonds carry AA-minus ratings from both rating agencies. Fitch’s outlook is positive while Standard & Poor’s assigns a stable outlook to the transaction. Moody’s Investors Service does not rate the credit.
“Pledged tobacco settlement revenues are the expected source of payment; however, ultimate security and the assigned rating rests on contingency contracts with the state of New York whereby shortfalls in debt service would be paid by the state, subject to annual appropriation,” according to a Fitch report.
The TSFC had $2.77 billion of outstanding asset-backed revenue bonds, as of June 1, according to the preliminary official statement.
Hawkins Delafield & Wood LLP is bond counsel. Public Resources Advisory Group is the financial adviser.
The transaction offers serial maturities from 2013 to 2018, for $419.7 million of Series 2011A bonds and $555.7 million of Series B, according to the POS.
Proceeds will refinance Series 2003A-1C bonds and Series 2003B-1C bonds for debt service savings.
As of now, officials do not anticipate using the state’s general fund revenues to help repay the tobacco bonds. The corporation estimates total available funds — which includes tobacco settlement payments and interest earned on debt-service reserve funds — will surpass principal and interest payments for the Series A and B bonds.
Total anticipated available funds for Series A and Series B bonds — including the Series 2011A and B bonds — is $446.6 million in 2012 compared to $343.8 million of principal and interest costs due that year. In 2022, the final maturity for the bonds, projected available resources total $441.7 million while debt service costs will total $300.1 million, according to the POS.
The corporation projects debt service coverage on all Series A bonds — including the Series 2011A bonds — will range from 1.28 times in 2012 to a low 1.02 times in 2022, the POS says. The bonds will have a high coverage of 2 times in 2013, 2014, and 2015.
Debt service coverage on all Series B bonds will range from 1.3 times in 2012 to a high 2.61 times in 2022. Principal and interest coverage will hit a low 1.06 times in 2021.
Those coverage levels depend upon future tobacco settlement payments, which are based on cigarette shipments. New York receives 12.76% of the tobacco companies’ yearly payments under the agreement with 46 states. Those payments are part of a nationwide 1998 multi-state agreement between state governments and cigarette manufacturers.
People have been smoking less during the past few years and analysts expect that trend to continue.
Richard Larkin, senior vice president at Herbert J. Sims & Co., said he anticipates cigarette consumption will decline by at least 4% annually in the future.
Janney Capital Markets Wednesday released a report on tobacco bonds with a similar projection. The firm also views a potential financial resolution between large cigarette makers and the states regarding smaller manufacturers that do not participate in the yearly settlement payments as a positive for tobacco bond credits.
“We retain our cautious outlook for the sector, but believe that the worst is behind, and expect consumption declines leveling out in the 4% range along with resolution of the [non-participating manufacturer] disputes to provide more consistent cash flows in the future,” Janney managing director Alan Schankel wrote in the report.
The Wall Street Journal on Wednesday reported that Philip Morris USA and the other large cigarette manufacturers included in the 1998 settlement agreement may gain $2 billion from an escrowed dispute fund. That would leave roughly $600 million for the states, Larkin said. While any cash boost is a credit positive, a $600 million windfall may not be enough to offset the downturn in smoking.
“It’s not going to be enough to withstand or to elevate the long-term consumption declines,” Larkin said in a telephone interview. “It’s a one-time infusion and $600 million is not going to make all tobacco bonds cash good immediately.”
The TSFC was unable to comment on the refinancing by press time.