New York City has postponed its $700 million tobacco securitization offering until next year because it has found better value in its income tax securitization program with the Transitional Finance Authority, city officials said. The state was allowed to increase its securitization quota for this program last year from $7.5 billion to $9.5 billion.

"The income tax securitization bonds sell better in the marketplace than tobacco bonds," said Allen Anders, a treasurer at TFA.

Though NYC's tobacco bonds typically have higher ratings than other comparative instruments, income tax bonds "as a credit seem to be better received by investors," Anders said

The TFA is planning to push through with its income tax securitization in May with an offering roughly totaling $450 million. This transaction will be followed by another similarly sized deal in November, a schedule that the TFA will likely follow going forward. TFA is working with Bear Stearns, Lehman Brothers and Morgan Stanley on the deals.

In the meantime, the city's tobacco securitization will likely take place in three $700 million installments, with the next deal expected to take place in 2002. Salomon Smith Barney, J.P. Morgan Chase, and Bear Stearns are working with the state on these transactions.

Taxable tobacco bonds?

New York City goes against the grain, as other issuers have come to the market with sizeable offerings in the past two weeks - a $525 million of District of Columbia Settlement Corporation tobacco asset-backed bonds and a Bear Stearns-led $945 million deal from the South Carolina Tobacco Settlement Management Authority.

The South Carolina deal is unique because it carried the first-ever $200 million taxable series of tobacco bonds, a move that people say Florida and Iowa have explored.

"I think it's an option that some other states may consider," said James Grady, a director at Fitch.

According to Michael Sponhaour, a spokesman for the South Carolina Tobacco Settlement Authority, the transaction carries a taxable portion because the law that is allowing the securitization sets up a number of trust funds and one of those trust funds deals with aid to farmers and to local governments. These are outside the normally permitted tax-exempt uses so the state had to implement a taxable component.

Aside from a higher interest rate for the the taxable bonds, rating agency analysts say that they view everything else about the taxable and non-taxable parts of the transaction in the same way.

The South Carolina deal also includes a turbo feature. This feature will cause all the bonds to pay down sequentially, with the taxable tranche being paid out first.

"It's a positive feature as the higher coupon bonds will be retired earlier, leading to a lower debt service cost in the future," said Grady. "The drawback is it creates prepayment risk."

The deal ,which came to market last Thursday, by all accounts met with positive results.

"We are very pleased with the market's response to this issue," said Sponhaour. "We ended up with $1.6 billion in orders and a final yield for the trust funds of about $16 million more than we had anticipated."

The California Deals

Meanwhile, California tobacco deals have hit a roadblock as state counties postponed their tobacco deals until legal fees pertaining to the counties' case against the major tobacco manufacturers are settled.

Last fall, an arbitration panel awarded $637.5 million to private law firms that represented 19 or so Californian counties in the case against tobacco manufacturers. These law firms also entered into separate contracts with the counties that required the counties to pay approximately 15% of what was recovered from the settlement. The lawyers are currently collecting on these separate contracts. However, according to people familiar with the situation, some of the counties are refusing to pay because they believe that the amount awarded by the arbitration panel is sufficient, while others are seeking a resolution.

"There's an attempt on the part of the counties to try to reach a settlement with the lawyers," said one county official. "It's clear that not every county feels necessarily the same way about whether a settlement is appropriate or not so what is probably going to need to take place is for each county to begin working directly with the attorneys to try to reach a settlement. But no one really wants to be the first because it will set the pattern for everyone else and the first one who works out a settlement may be criticized afterwards."

Other Deals

In the meantime, tobacco transactions which were about ready to go have been stalled indefinitely.

San Diego County's Merrill Lynch and J.P. Morgan-led $400 million deal will be ready "in a matter of weeks" after a legal fee settlement is reached, said Lisa Keller-Chiodo, manager of capital projects for San Diego County. The county is expected to receive $945 million throughout the life of the deal.

Sacramento's $180 million to $185 million is about ready, but the county hasn't been able to get a rating for the transaction finalized because of the lack of resolution to the legal fee issue. The transaction is currently being solely led by Salomon Smith Barney, but the county is planning to choose co-managers when the offering is nearing issuance.

"It's very, very close to being ready but because of the legal fee issue hanging everything up, we haven't been able to complete the last few steps," said a county official.

Also in the works is a deal from a pool of states being assembled by the California State Association of Counties. Salomon Smith Barney, JP Morgan and Sutro & Co. are leading the deal. The county is currently asking prospective participating counties, now about 22-23, to pass resolutions with their boards to commit to the transaction. The deal size, as the number of pool participants, has not yet been determined.

Orrick, Herrington and Sutcliffe LLP is serving as counsel for all three transactions.

In related news, reports have indicated that Riverside County is in the early stages of structuring a tobacco outing.

Aside from the California counties, Arkansas is also preparing for a $60 million offering led by Morgan Stanley. People familiar with the deal said that it would likely come after the California deals.

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