A tobacco refunding could join slate of Illinois deals in the works.

CHICAGO – Illinois may refund of some of its $1.5 billion in 2010 tobacco settlement bonds.

"We are reviewing the option to see if a refinancing opportunity exists in an effort to save taxpayers money," said Catherine Kelly, a spokeswoman for Gov. Bruce Rauner's administration.

The Illinois Railsplitter Tobacco Settlement Authority, which was established to securitize the state's portion of the national tobacco settlement, met earlier this week and a "solicitation" item appeared on the agenda.

Kelly could not say what action was taken.

Several market participants said public finance bankers have brought refunding ideas to the state to take advantage of big savings.

A 2024 maturity for $104 million became callable June 1. It was priced at the stated yield of 5.750% to the first optional call date. Bankers said a refunding could generate savings of more than 20%.

Another $500 million could be advance refunded achieving more modest savings in the 5% range.

Any new revenue would help the state face a $5.4 billion deficit and a nearly $8.8 billion unpaid bill backlog. Efforts to solve a more than year-old budget impasse have been pushed off until after the November elections.

Public finance bankers said the low-interest rate environment, the original deal's conservative structure, and the market's appetite for high-yield products bode well for a refunding's prospects.

"It's a very marketable structure," said one banker.

The conservative structure ensured bondholders would be repaid even if cigarette consumption fell annually by 10% in future years amid rising tobacco taxes and local government and state actions to ban or limit smoking and raise the legal smoking age. Recent consumption decreases have been about 4% and IHS Global Inc. last year forecasted the average annual rate of decline at 3% from 2015 through 2045.

The state dropped the turbo redemptions, super-sinking funds and capital appreciation bonds popular in earlier deals in the tobacco securitization sector in favor of a more traditional tax-exempt structure that offered a mix of serials and term bonds limited to a 17-year maturity. Yields landed at between 2.1% and 6.1%. It also provided a significant cash cushion in debt-service coverage ratios and a reserve that was funded at $146 million. The structure provided more cash flow than seen in issues from the tobacco sector.

Illinois used the roughly $1.3 billion raised by the sale to pay off a backlog of fiscal 2010 bills as it grappled with a $12 billion deficit. The deal marked the state's first and only issue securitizing its share of payments under the 1998 Master Settlement Agreement between 46 states and most major tobacco companies.

It was the first tobacco securitization bond sale in more than two years from a sector that had been battered by cigarette consumption declines, lawsuits, rising taxes, downgrades, and default warnings due to the more aggressive structures on earlier transactions. The market has seen a limited number of new transactions since early 2015.

The bonds were backed solely by the state's share of its payments which was estimated to total $9.1 billion through 2025. Actual payments depend on a complex formula adjusted for the size of the cigarette market, inflation, consumption, and other factors. States have received more than $50 billion so far under the MSA.

The Railsplitter authority purchased all of the state's assets from the agreement and all payments were pledged to bondholders. The deal securitized 45% of those assets.

S&P Global Ratings currently assigns A ratings to the Railsplitter bonds, except for a 2028 maturity rated A-minus.

Fitch Ratings had assigned its highest tobacco rating, a BBB-plus, to the Railsplitter issue, but in June it withdrew all its tobacco bond ratings due what it considers the growing difficulty and uncertainty of predicting future payments from the master settlement.

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