Like many fund managers, Van Kampen's Dennis Pietrzak has many questions about the recent tobacco pact, which may introduce a new type of bond to the industry. So far, only New York City has taken the first steps toward securitizing the proceeds.
"Who's on the hook?" he asked. "Will insurance be available for these types of bonds? If not, what type of rating will the agencies assign?"
Pietrzak, who runs the New York and Pennsylvania tax-free municipal bond funds for Van Kampen in Oakbrook Terrace, Ill., said he hasn't seen much literature on the subject because of its newness to the market.
He would like to see a deal in the works. But until that occurs, he is most concerned that the revenue source for paying off such debt is backed by a private corporation instead of a municipality.
"If the tobacco industry falls into hard times - which it probably won't based on how many people smoke today - but if they do and can't pay the debt service, what happens then?" he wonders.
In addition, Pietrzak says it's important to know if each tobacco company's payments carry any kind of guarantee or if each is the sole source of settlement payments.
Pietrzak is quick to say that while he might be interested in New York City's bond deal, he would need to mull over the specifics when they're ready.
"Until I see how it is structured and set up, the rating - the whole nine yards - it's hard to cast any judgment," he said.
Cities or states backing these types of bonds, rather than simply relying on the settlement proceeds alone, would strengthen the deal, Pietrzak noted.
"Is New York City willing to do that? I don't know, but it would give the debt additional security," he added.
