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California County Eyes Tobacco Bond Refinancing

Another municipality is looking to refinance its tobacco settlement bonds, taking some more money off the table in the process.

California County Tobacco Securitization Agency (Kern County Tobacco Asset Securitization Authority) has launched a $95.5 million offering of bonds backed by payments from tobacco companies that would refinance a portion of tobacco bonds it issued in 2002, according to Fitch Ratings. 

The series 2014 serial bonds will consist of approximately $28.65 million of fixed-rate current interest bonds, which will mature annually between June 1, 2015 and June 1, 2024. There are also $66.84 million of term bonds maturing from June 1, 2029 through June 1, 2040 are subject to optional redemption, to the extent funds are available in the surplus account, commencing June 1, 2015.

Raymond James is the lead underwriter. 

Fitch has assigned a preliminary ‘BBB+’ rating to the bonds. 

California County Tobacco Securitization Agency will refinance $82.4 million of outstanding 2002 bonds backed by payments from tobacco companies, including Philip Morris USA Inc., Reynolds American Inc. and Lorillard Tobacco Co. The transaction will also create additional proceeds that will be payable to the Kern county, as holder of the residual certificate.  

Tobacco bond refinancings have run into some trouble.  In late July, Rhode Island launched an offering of $593 million of new bonds backed by payments from participating tobacco manufacturers under the Master Settlement Agreement. Proceeds would be used to redeem approximately $523 million of tobacco settlement bonds outstanding that it issued in 2002, repurchase some of the notes it issued in 2007, and make a payment of at least $20 million to the state, according to the prospectus.  The sale however was blocked by a group of Oppenheimer's mutual fund.

Oppenheimer  questioned the legality of the pro forma seniority stack and argued that the $20 million payout to the state would be a violation of the Tobacco Settlement Act, a document that created the public corporation issuing the debt and "incorporated a number of significant bondholder protections," according to court documents.

Oppenheimer claims that the payment to the state would violate language that says, "pledg[ing] to and agree[ing] to with the holders of any bonds issued under [the Act] the state will not limit or alter the rights vested in the Corporation to fulfill the terms of any agreements made with the holders, or otherwise take any action that materially and adversely affects the rights of the holders…"

According to the offering documents for the California deal, “there is no litigation pending in state or federal court to restrain the issuance of the Series 2014 bonds." 

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