In what is turning into a subway series all its own, Nassau County, N.Y., was set to belt New York State's first tobacco-backed ABS into the crowd this week, but pulled from market at the last minute, giving way to the larger of the two issuers, New York City.

"We decided to stretch the schedule a little bit," said Herman Charbonneau at Roosevelt & Cross Inc., the firm advising the Nassau County Treasury Office. "[We wanted] to create more time for the marketing effort, and to get a solid handle on what all the rating agencies would have to say."

Currently, Nassau's offering looks to be $275 million in size, structured in one large tranche. Salomon Smith Barney and Bear, Stearns & Co. are lead managers. The bonds have an average life of 30-years.

"A $100 million portion of the proceeds will be used to meet certain healthcare expense requirements over the next few years," said Charbonneau. "And the balance would help with the current budget and next year's budget also."

Nassau is now set to price the second week of November, giving New York the lead.

"We thought we might do it in the first week of November, but New York City has their big issue, more than $600 million, that they want to do, and I think they're going to price a little ahead of us," said Charbonneau.

"We're not in any race with New York," Charbonneau added. He also said that, with size as the exception, the two deals are structured similarly.

The Trouble With Ratings

Standard & Poor's Ratings Group announced last week that they've placed a single-A ceiling on the ratings they'll give tobacco-backed bonds, which stirred some heads, as both issuers were hoping to receive double-A ratings.

However, according to Alan Anders, New York City's director of public finance, S&P's announcement was not all bad.

"We were gratified to see that S&P commented on a number of the strengths of these structured tobacco settlement deals in addition to mentioning some of the continuing concerns they have about litigation," Anders said.

There are currently two major lawsuits against the tobacco companies: a federal lawsuit, which was filed last month and a pending class action lawsuit in Florida.

As an example of S&P's concerns, last week a Florida judge ruled that the jury will determine punitive damages on a class action basis against the tobacco companies, which could cost the companies more than $100 billion. As a result, Phillip Morris Cos. stock dropped 12.2% in one day.

"Certainly the rating agencies and some others were waiting for the results of the case that came out [Wednesday]," said Charbonneau. "I think they had built into their thinking the possibility that the case might turn out the way it did."

According to Rich Gugliada, of S&P, both cases have a long way to go before reaching settlements, but S&P will rate the deals working under the assumption that the lawsuits will be successful to some degree, as analysts at the ratings agency have determined that the lawsuits' success could interfere with revenue streams.

"What we're factoring in is everything known to date, to a reasonable degree," said Gugliada.

Though Moody's Investor Service has yet to announce a formal position, a source at the company said, "With respect to any potential transaction, unlike some of the other ratings agencies, we have not put a rating cap on where we can go.

"I think, given the proper appropriate legal and structural enhancements, we could conceivably rate a transaction above the single-A limit."

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