Suffolk County Sells $37M Of Tobacco Bonds Early

Suffolk County, N.Y., home of the Hamptons and a $530 million three-year budget deficit, issued $37 million of tobacco bonds Wednesday — one day ahead of schedule in order to take advantage of favorable market conditions.

The county will use proceeds from the bonds to defease debt used for capital projects and to inject funds into a liquidity reserve account.

The bonds, with maturities ranging from 2013 to 2037, were issued through the Suffolk Tobacco Asset Securitization Corp. The bonds maturing up to 2017 are taxable.

Citi was the lead underwriter and Capital Markets Advisors was the financial advisor.

Richard Tortora of Capital Markets Advisors said yields from a preliminary pricing range from 1.83% to 3.34% on the taxable bonds and 2.71% to 5.34% on the tax-exempt bonds.

The new bonds are backed by Suffolk County’s share of revenue it receives from the 1998 Master Settlement Agreement with tobacco companies.

According to a presale report by Standard & Poor’s, Suffolk’s share of annual payments under the MSA is 0.341%.  Last year, its payment was about $18.4 million, as reported by the county.

Tobacco bonds have become more risky in recent years as payments are based on cigarette consumption in the United States, which has been declining.

Standar & Poor’s reported that cigarette shipments declined 9.3% in 2009 and 6.4% in 2010, higher rates than in recent years, which saw declines in the range of 3% to 4%.

Despite the decline, underlying demand for cigarettes remains, Standard & Poor’s said.

The rating agency assigned preliminary structured finance ratings of A on bonds maturing from 2013 to 2022, A-minus on bonds maturing from 2023 to 2032, and BBB-plus on bonds maturing in 2037. 

Standard & Poor’s said it assigned the varied preliminary ratings based on its belief that a “longer time horizon to legal maturity” increases the uncertainty of projections and potential for event risk in the tobacco industry and in tobacco securitizations.

“Therefore, we believe that the preliminary ratings on the bonds with the longer maturity profiles should be closer to the tobacco industry’s business risk profile and the current ratings on the three largest manufacturers,” S&P said.

The transaction’s structure, which allows it to withstand an 8.6% year-over-year decline in cigarette consumption, is cited as a strength in the presale report.

Other strengths include the liquidity reserve account that will cover interest and principal payments for one year, strong debt-service coverage, and the investment-grade quality of the three largest tobacco manufacturers.

Moody’s Investors Service and Fitch Ratings have not rated the tobacco bonds, but rate Suffolk County’s outstanding GO bonds at A1 and AA-minus, respectively, with a negative outlook.

Moody’s downgraded the GOs earlier this month, after the county declared a fiscal emergency and cited narrowed liquidity after recurring operating deficits reduced reserve levels.

Suffolk County Executive Steve Bellone announced the fiscal emergency on March 6, saying he was stunned to learn that the 2011 budget was not balanced.

While Bellone did not publicly mention the previous administration, the Wall Street Journal this week reported that, according to people familiar with the matter, his administration recently circulated a memo accusing his predecessor, Steve Levy, of intentionally misleading bond investors, rating agencies and legislators about the county’s fiscal health.

The newspaper reported that the memo has drawn the attention of the Suffolk County district attorney’s office investigators.

Levy called the memo “political nonsense” by an administration that wants to pass blame and said he had not been contacted by the district attorney’s office, the Journal reported.

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