New Jerseys Tobacco Settlement Financing Corp. will next week sell $2.4 billion of debt to restructure outstanding tobacco settlement revenue bonds.
Bear, Stearns & Co. is slated to run the books on the transaction and Citigroup Global Markets Inc., First Albany Capital Inc., UBS Financial Services Inc., and Wachovia Securities LLC are on board as co-senior managers, said Tom Vincz, a state Treasury Department spokesman. McManimon & Scotland LLC is bond counsel, he said.
The state has about $3.8 billion of outstanding tobacco settlement debt, which is backed by payments from the 1998 Master Settlement Agreement between the cigarette industry and most U.S. states. Next weeks transaction will refinance debt issued in 2003. The state also leveraged anticipated payments with a 2002 borrowing.
They will use the proceeds to advance refund all outstanding 2003 bonds, capitalize interest, and fund the debt service reserve account. After satisfying that criteria, pay the balances to the owner, which is the corporation, Vincz said. They are essentially going to provide a residual certificate as a cash payment to the state.
The certificate payment is money the state will receive from proceeds that are not needed to make payment obligations to bondholders, capital interest, or debt service costs. Vincz said the state hopes for a cash windfall of as much as $150 million.
This is revenue that is not committed, he said. Its estimated to be $150 million, but we are not sure how large that will be. It could be larger or it could be smaller.
New Jersey will be the latest state to refinance its outstanding tobacco settlement bonds. Earlier this week, the Golden State Tobacco Securitization Corp. brought a $3.11 billion deal to market. Other states and local governments are considering such transactions, including Louisiana and fiscally troubled Erie County, N.Y. Westchester County, N.Y., earlier this year freed up roughly $27 million of cash that had been held in reserves by refunding some of its tobacco debt.
The reason why they are bringing them now is that spreads are so tight the yields are great for the issuer, said B. Clark Stamper, president of California-based Stamper Capital & Investments Inc. Whoever issues first before it widens out is the smartest.
Stamper said that today, tobacco bonds are yielding only 35 basis points above the triple-A curve on the long end. The California debt extends to 2045. In 2003, when the New Jersey deal being refunded came to market, they were yielding at 400 basis points over the triple-A curve.
Its almost like issuing them at triple-A right now because its only a 35 point spread to triple-A on the long end of the curve, Stamper said. If they were at the same spread as they were in 2003, they would be at 8.30.
Like New Jersey, Stamper said other states are restructuring their old tobacco deals and taking money out after issuing the new debt.
Whats interesting about the California deal is that they did some zero-coupon bonds. That actually allows them to push out their payments slick, he said. I dont think I had seen any zero-coupon bonds before.
To some extent, issuers are bringing these deals as a stopgap measure with the hope that an improving economy will help their states out financially. But there are other reasons as well.
The main reason is that they need the money to plug their deficits, Stamper said. The other reason is that the math works or they wouldnt be doing it.
