Seven New York counties are issuing another $292 million of bond backed by tobacco settlement payments.
Proceeds will be used, in part, to retire outstanding tobacco bonds paying higher interest rates, allowing the issuers to lower their debt servicing costs. Some of the bonds will be repaid and others will be retired through an exchange of old debt for new debt.
Investors may also stand to benefit, however, since some of the old bonds are being retired at a price above their accreted value.
The new notes will be issued by the New York Counties Tobacco Trust VI, a public corporation created by Broome, Dutchess, Onondaga, Oswego, Rensselaer, Sullivan and Ulster Counties in order to consolidate their issuance.
Jefferies is the underwriter, according to the deal’s prospectus.
Tobacco bonds are backed by money that U.S. tobacco companies pay under a 1998 master settlement agreement to compensate 46 states, Washington D.C., and Puerto Rico for the cost of caring for sick smokers. A number of states have securitized these payments, exchanging future receipts for a lump sum payment from bondholders.
Investors in these bonds assume the risk that settlement payments will decline in line with consumption of cigarettes. But in a number of cases, they have managed to avoid this risk by influencing the terms of a refinancing. A 2014 tobacco bond refinancing by another New York county, Niagara, put more money in the hands of investors than the county, as ProPublica has reported.
NYCTT VI is issuing five tranches of notes: $132 million of series 2016A-1 turbo, non-callable exchange bonds; $119 million of series 2016A-2 turbo, callable bonds; $21 million of series A-2A federally taxable; $21 million series B hard-amortization senior bonds; and $20 million series C subordinated turbo bonds, according to a presale report published by Standard & Poor’s and the deal prospectus.
S&P expects to assign ratings ranging from ‘A’ to ‘BBB-‘ to the new bonds, depending on their payment priority and tenor.
A portion of proceeds A2 bonds issued on behalf of Broome, Dutchess, Onandaga and Rennselaer will be used to redeem class S1 subordinated bonds issued on behalf of these counties in prior deals. Bondholders will receive 101 of accreted value.
Another portion of the proceeds of class A2 issuance will be used to repurchase portion of class S2 and S4 subordinate bonds issued in prior deals. These classes of securities are held by a group of related investors, which will pay an exchange premium, not specified in the prospectus. This premium will fund a distribution to the counties, as holders of the most subordinate class of securities in the new deal, known as “residual certificates.”
However, a portion of the subordinate bonds, which do not pay interest until they mature in 30 or 40 years, will remain outstanding. While payments will not commence until all of the series 2016 bonds have been repaid, they will pile up huge sums of unpaid interest in the meantime.
The $41 million in proceeds of the series B and C bonds, along with other funds, will be used to refund all of the counties' outstanding senior bonds, which pay interest rates ranging from 5.625% to 6.75%, according to the offering prospectus.
However, these new notes also pay no interest until maturity, piling up sums of unpaid interest in the meantime.