The state of Wisconsin is planning to execute a $1 billion-area tobacco litigation settlement ABS by year-end, although an underwriter had not yet been named as of press time, rating-agency and bank sources said.
It is not clear whether there will be a taxable portion, although bankers are understood to have made the option readily available in their proposals to state authorities. Meanwhile, San Diego County has a $600 million-area tobacco settlement issue via Merrill Lynch scheduled for November, but this one is expected to be tax-exempt.
Bankers are optimistic on prospects of seeing more taxable tobacco litigation settlement ABS deals like the Louisiana Litigation Settlement ABS that printed last week via Bear Stearns.
"As the economy slows and tax receipts dry-up, states might re-examine doing these deals to make-up for shortfalls," says Dan Castro, head of ABS research at Merrill Lynch.
As far as an incentive for bankers to encourage states to securitize, "These deals pay a lot better than credit cards or autos," Castro added. By creating a taxable portion of these municipal-hybrid securitization deals the states get more flexibility on how they use the funds, since tax-exempt bonds have heavy restrictions on the use of moneys.
The $292 million taxable portion of the Louisiana settlement deal was created by placing a slice of bond proceeds into a taxable endowment fund controlled by the state.
The transaction has a final legal maturity in 2039, but Bear structured a turbo feature to shorten the expected maturity of the entire issue to 2028. Turbo' means all revenues are used to retire scheduled and unscheduled debt, whereas a residual deal would use available revenue to retire only scheduled debt and pass excess unneeded revenues to the residual holder - not to bondholders.
Nevertheless, the taxable portion has a 4.6-year weighted average life that priced at U.S. Treasurys plus 275 basis points, with a dollar price of 99.99.
According to Bernard Fischer, a director in Standard & Poor's new asset group, states are scheduled to collect $200 billion worth of settlement revenue from the participating tobacco companies over the next 25 years as part of a Master Settlement Agreement between the states and the tobacco industry, in order to settle related claims.
These deals typically are rated single-A by S&P, which correlates to the rating agency's outlook on the tobacco industry and the transactions' ability to perform under various stress scenarios. Of the total participating manufacturers, 96% of the settlement money comes from Phillip Morris, RJ Reynolds, Lorillard Tobacco Company, and Brown & Williamson.
