California is the next state planning to refinance bonds backed by settlement payments from cigarette manufacturers.

The Golden State Tobacco Securitization Corp. is offering $1.7 billion of Series 2015A bonds, according to a presale report published this week by Fitch Ratings. The securities are “enhanced” by a pledge from state to seek an annual appropriation for debt service and operating expenses should settlement payments fall short.

Fitch Ratings assigns an 'A' rating to bonds, one notch below its rating on the state of California. Fitch upgraded the general obligation rating of the state in February, to ‘A+’.

Fitch expects the bonds to be sold via negotiated sale on or about the week of March 23.

Proceeds will be used to repay existing tobacco bonds that do not benefit from a pledge from the state and so are more vulnerable to as shortfall in settlement payments. 

The Golden State Tobacco Securitization Corp. originally sold tobacco settlement bonds in 2003 to provide one-time resources for the state general fund under two separate, parity indentures, according to Fitch. The master indenture for series 2003B, to which 43.43% of the state's future tobacco settlement revenues under the master settlement agreement are pledged, was enhanced with the state appropriation backup. The other bonds originally issued under a separate 2003A master indenture do not carry the state appropriation enhancement.

Under the bond documents, the Golden State Tobacco Securitization Corp. is required to notify the state by Nov. 1 each year, in time for budget formulation, of the debt service and operating expenses due in the following fiscal year. The state covenants that the director of finance will request that the governor include an appropriation for the succeeding year's debt service and operating expenses, and that the governor in each year will request such an appropriation from the legislature. Since 2004, the governor has requested, and the state's annual budgets have included, a nominal appropriation of $1,000 with the authority to augment funding without legislative approval.

In a 1998 accord, tobacco companies agreed to pay 46 states for expenses associated with smoking-related illnesses. California created the Golden State Tobacco Securitization Corp. to raise money from the deal, selling bonds backed by future settlement revenue in exchange for an immediate payment.

California is coming to market just days after Rhode Island’s Tobacco Settlement Financing Corp. priced $618 million of tobacco bonds this week. That sale was delayed for seven months by a legal challenge from OppenheimerFunds Inc., which owned tobacco bond being refinanced by the new debt.

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