California to Sell $2.3 Billion of Enhanced Tobacco Bonds

SAN FRANCISCO — California has set a tentative date of Sept. 23 to issue approximately $2.3 billion in enhanced tobacco bonds.

Citigroup Global Markets Inc. will serve as senior manager for the deal, with Bear, Stearns & Co., First Albany Corp., and UBS Financial Services as co-senior managers. Seventeen other investment-banking firms are co-managers.

Orrick, Herrington & Sutcliffe is bond counsel, and the Law Offices of Leslie M. Lava is co-bond counsel.

Lamont Financial Services and Public Resources Advisory Group are the financial advisers.

The sale depends upon market conditions, according to a spokesman for state treasurer Phil Angelides. The bonds will mature in 40 years, but an early payoff is anticipated.

Phil Angelides

Revenue from the state’s share of the 1998 Master Settlement Agreement with the major tobacco companies will secure the bonds, but the state is also expected to pledge annual appropriations from its general fund as a “backstop” to enhance the security of the debt, according to Mitchel Benson, a spokesman for the treasurer.Lawmakers anticipated using the proceeds from the tobacco bond sale in order to help eliminate a $38 billion shortfall when they adopted a budget package for fiscal 2004. They included in the terms of the sale that the general fund would make up any shortfall in debt service should MSA revenue prove insufficient.

Gov. Gray Davis yesterday signed legislation that expanded California’s smoke-free zones to 20 feet from the entrances and exits of public buildings, from five feet.

Standard & Poor’s on Aug. 28 lowered its ratings for most outstanding tobacco securitizations to BBB, affecting $17 billion in debt, the latest in a series of downgrades that have battered the sector. The downgrades were brought about in part by heightened concerns over litigation against tobacco companies.

The Golden State Tobacco Securitization Corp. sold $3 billion in tobacco bonds in January, but the planned sale of $2 billion more in April was cancelled because the market for unenhanced tobacco securitizations collapsed following an Illinois court’s decision to require Philip Morris USA to post a huge appeal bond in a case involving so-called light cigarettes.

Two states, Oregon and New York, have sold deals in 2003 pledging tobacco settlement revenues plus security from other revenue sources to repay bondholders.

California expects to sell $3 billion in revenue anticipation notes and $2 billion of pension obligation bonds this fall. It also must sell $11 billion in deficit bonds in 2004.

In other matters, former baseball commissioner Peter Ueberroth, a Republican, announced late yesterday that he is dropping out of the contest to replace Davis in the gubernatorial recall election set for Oct. 7.

The announcement came a day after the Secretary of State Kevin Shelley began sending out absentee ballots.

“From an elections point of view, his name will remain on the ballot, so the voters will see his name,” said Terri Carbaugh, a spokeswoman for Shelley.

Republican candidate Arnold Schwarzenegger issued a statement saying he commended Ueberroth “for running a positive and principled campaign for governor.”

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