=DJ MUNI WATCH: NYC Taps Into Tobacco Vein With $1.4B Bonds
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By Stan Rosenberg
A DOW JONES NEWSWIRES COLUMN
NEW YORK (Dow Jones)--New York City Thursday moved to free up an estimated $100 million or more of capital for its general fund by tapping into a cash vein existing in older municipal tobacco bonds.
Underwriters for the city's TSASC, Inc. - an acronym for Tobacco Settlement Asset Securitization Corp. - priced $1.4 billion of that entity's new bonds in order to refinance two higher-rate deals sold in 1999 and 2002.
This "refunding" of the outstanding debt allowed the Big Apple to get rid of TSASC's older bond indentures - legal documents governing issue specifics - which forced the city to keep certain surplus funds in a bondholder reserve instead of for its own purposes.
The bond covenants called for those reserves, representing part of the cash flow from annual payments made by major tobacco manufacturers under a 1998 Master Settlement Agreement with 46 states, to be trapped under certain circumstances. One of them was a downgrade in the corporate credit rating of any of the four original participating manufacturers to below investment grade.
A 2003 downgrade of Reynolds American Inc.'s (RAI) R.J. Reynolds & Co. debt to Ba1 by Moody's Investor Service triggered that requirement, forcing TSASC to reserve up to 25% of outstanding bond principal for bondholders. That was money beyond what was needed to pay interest on the bonds, meet early retirement provisions and pay other expenses.
Since the Reynolds downgrade, New York City had been looking at ways to eliminate the trapping requirement and decided last month on refunding the older bonds, said Raymond J. Orlando, TSASC's Director of Investor Relations.
The market for municipal tobacco bonds has improved sharply since being shocked in 2003 by a $10.1 billion trial court award in a class-action lawsuit against Altria Group Inc. (MO) unit Philip Morris USA. That award was thrown out late last year by the Illinois Supreme Court, but not before muni long-term tobacco bonds had zoomed to yields of about 8.40%. The market effectively was closed to new offerings until last year.
A Department of Justice attempt to recover $280 billion in profits in a racketeering case against cigarette manufacturers was thwarted last February by a U.S. appeals court ruling.
A decision is pending from Florida's Supreme Court on an appeals court's overturning a $145 billion verdict against major cigarette manufacturers in another class-action lawsuit. Two major lawsuits challenging the validity of the MSA also are still in the courts, but they could take years to resolve.
"People are substantially more comfortable with tobacco," said Ron Fielding, lead portfolio manager for the more than $22 billion in municipal bond funds offered by Oppenheimer Funds, Inc.
Fielding planned to buy some of the bonds.
Yields on TSASC's latest issue ranged from 4.83% for bonds scheduled to mature in 2022 to 5.35% for bonds with a 2042 maturity, but all of the bonds have accelerated, or "turbo," maturities that shorten their average lives. The 2022 bonds, for example, are expected to be redeemed by 2014 and so have a projected average life of 4.7 years. The 2042 bonds would be redeemed by 2033 and carry a 20.4-year projected average life.
Underwriters led by Bear, Stearns & Co. Inc. said the issue was oversubscribed.
The securities, rated triple-B by Standard & Poor's and Fitch Ratings, offered about 50 basis points more yield for long-term bonds than other comparably rated municipal paper, Fielding said. Underscoring the market's improvement, "in March of 2003, you would have been talking about 250 to 300 basis points," he said.
Another factor that he saw working in the deal's favor was that municipal bond investors last month had to scramble if they wanted to buy bonds. January was a "very thin month" for new issuance, "particularly in New York State," Fielding said. New long-term tax-exempt bond volume last month fell almost 21% from January 2005 to $17.8 billion, the lightest month since September 2001, according to data provider Thomson Financial.
(Stan Rosenberg, a veteran observer of the municipal bond industry, writes about issues and trends in the muni market for Dow Jones Newswires.)
-By Stan Rosenberg, Dow Jones Newswires, 201-938-2143; stan.rosenberg@dowjones.com
(END) Dow Jones Newswires |
