The New Jersey Economic Development Authority is scheduled to sell $1 billion of cigarette-tax revenue refunding bonds on Tuesday, with retail pricing Monday.
“We suspect this will be an attractive purchase for investors,” said Andrew Pratt, communications director at the New Jersey treasurer’s office. The NJEDA is a state instrumentality.
With a Baa1 from Moody’s Investors Service and an equivalent BBB-plus from Fitch Ratings and Standard & Poor’s, the bonds are rated at the lower end of investment grade.
The bonds, which are structured as serials and terms, will target investors looking for higher yield, with more risk but still backed by a solid revenue stream in New Jersey, Pratt said.
The ratings are higher than the cigarette-tax bonds being restructured. Moody’s cited “improved security provided through legal document revisions and debt-service restructuring being implemented with the current refunding” in rating the new issue two notches higher than the debt being refinanced.
A Chicago trader called the deal a “different animal,” adding that there is a huge demand for yield and anything different.
Proceeds from the bonds will be used to refund all or a portion of the NJEDA’s $1.4 billion Series 2004 cigarette-tax revenue bonds, which were issued to balance its 2005 budget.
The bonds will not be insured and some will be subject to redemption.
Pratt said by refunding the bonds, the authority hopes to take advantage of lower interest rates. It will shorten bond maturities by five years — putting maturities for the new bonds at 2029 — and lower debt-service requirements.
Bank of America Merrill Lynch is the lead underwriter and Wolff & Samson PC is bond counsel.
The bonds are payable solely from and secured solely by payments made from the state of New Jersey’s cigarette tax revenues. Currently the state dedicates to bond payments 65 cents of its overall $2.70 per-pack tax.
Previously, the state pledged 78.6% of its cigarette-tax revenues to the bonds, but has changed it to 100% under a revised indenture.
The indenture also changed the authority’s structure of accelerated payment, under which any extra money not needed for debt service or reserve fund replenishment will flow to the state’s general fund instead of bond repayment, Fitch said in its report.
The rating agency added that the “shortening of the final maturity and strengthened debt-service coverage provides offset to the loss of the accelerated debt repayment feature.”
All three rating agencies assign a stable outlook.
Moody’s said its rating reflects the improved security provided through its revisions and debt-service restructuring that the current refunding implements.
It cites the “sensitivity of pledged revenues to tax-rate increases and regulatory changes,” declining cigarette consumption and sales, and risk of non-appropriation as challenges.
Payments from the cigarette-tax revenue fund to the authority are dependent upon appropriations from the Legislature.
All three rating agencies note the decline in cigarette tax revenues. Standard & Poor’s cited HIS Global Insight in its report, which projected that cigarette sales in New Jersey will increase by 0.4% in 2012 and then decline on average 3.04% annually.
“Smoking bans, changes in consumer habits, population growth trends and higher cigarette prices, among others, are drivers of cigarette-tax revenue,” the agency reported.
The report also says that in the past 10 years, the state has increased the cigarette tax rate five times, while federal excise taxes increased once in 2009. New Jersey does not plan to raise its cigarette tax, according to the current administration.
Pratt said that New Jersey may issue Garden State preservation trust bonds and school development authority bonds this month.
He declined to comment on their value, but said they would be backed by the state’s general fund. It all depends on the market, he said.
“We have specific goals for net present value savings,” Pratt said. “Market conditions have to be right.”
