The New York City Council looks ready to approve a plan trumpeted by Mayor Rudy Giuliani to securitize an estimated $7 billion in tobacco settlement payments likely coming to the city's coffers. But there are still questions about how ratings agencies would rate the bonds.

That sticking point is one of the council's main issues with the mayor's plan, and one they attempted to have answered in a meeting last week with representatives from Moody's Investors Service and Standard & Poor's.

But even with some unanswered questions, the council looks ready to consider the bonds a done deal, and will include them in its proposed $35 billion budget.

Debate about how the bonds should be rated continues, whether the issues should be considered to have a modified sovereign rating, as some potential issuers say, or whether any bonds coming from this deal should be subject to the tobacco companies' corporate ratings.

Standard & Poor's analyst Chris Howley said one issue for any future tobacco bond settlement deals is potential bankruptcy in the tobacco industry, given the small number of firms involved and efforts made to curb potential new clients for the tobacco companies.

Howley said these firms' corporate ratings will be key. "It's true [given] the size of the industry and the future of the industry, you cannot ignore how [the corporate bonds] are rated," he said. "We have to see where the total value of the industry is going. You have to believe that [no-smoking campaign efforts] will have some impact on demand."

S&P's rating analysis of any potential issue, he said, will depend on the "weak link" approach, meaning without further enhancement, ratings on any tobacco issue will be limited by the lowest senior unsecured rating of the four participating tobacco manufacturers - Loews Corp., BAT, RJR Nabisco and Philip Morris Cos.

In New York City's case, there is also the issue of how any funds coming to the state - the actual recipient of the funds - will be shared with municipalities. New York State is expected to receive $25 billion in funds, and besides the city, three other municipalities want part of the proceeds.

"The city has to come to agreement with the state on how they share the money," said Howley. "I think they've talked and are talking but they don't yet know how to split it."

The securitization is especially important for the city, since it has reached its issuing limit on general obligation bonds. - TC

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