Ohio looks to be next on the list of state governments securitizing their share of the $200 billion national tobacco settlement. The Buckeye State is considering a deal that, if approved, could provide a massive payday to underwriters and a large chunk of new tobacco-related ABS.
The state's overall share of the Master Settlement Agreement with cigarette manufacturers is estimated to be in the $18 billion range, and the Republican-controlled state legislature last week appeared to be close to approving Gov. Ted Strickland's plan to securitize all future payments in the settlement, which Ohio will receive annually over the next 40 years. The proposal passed the state house of representatives unanimously and now faces what observers said should be an easy vote in the state senate.
The Ohio tobacco securitization is expected to be in the $5 billion range and should generate some $28 million in underwriting fees, making the deal a lucrative prize for the Street's top tobacco bond underwriters, such as Bear Stearns. The deal would also be a welcome sign for investors that tobacco settlement bonds are continuing an upswing in new issuance, as the sector has been hit with controversy in recent years.
Should Ohio pass its securitization plan, it will be the 19th of 46 states that participated in the settlement to take the ABS route. Louisiana and Virginia are currently preparing their own tobacco securitizations to launch this summer. Tobacco deals recently faced skepticism from rating agencies like Moody's Investors Service, which brought up declining tobacco consumption as a negative factor on the manufacturers making the settlement payments, as well as legal challenges to the Master Settlement Agreement from smaller tobacco manufacturers.
The biggest obstacle to the proposed Ohio deal is concerns about the agency that will direct the securitization - the Ohio Tobacco Settlement Financing Authority, which will consist of the governor, state budget director, tax commissioner, attorney general and state auditor. All but the auditor are Democrats, and there already has been grumbling from columnists and rival politicians that since there are no set rules governing underwriter bids, some political paybacks could ensue.
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