Rhode Island has already securitized 100% of the payments it receives from tobacco companies under the 1998 master settlement to bondholders. Nevertheless, the state has found a way, with the help of Citigroup Global Markets, to refinance and take some more money off the table.

The state’s Tobacco Settlement Financing Corporation is offering $595 million of new bonds backed by payments from participating tobacco manufacturers under the master settlement agreement. Proceeds will be used to redeem approximately $523 million of tobacco settlement bonds outstanding that it issued in 2002, repurchase some of the notes issued in 2007, and make a payment of at least $20 million to the state, according to the prospectus.

Fitch Ratings expects to assign ‘BBB+’ rating to the Series 2014A and 2014B securities, which have maturities ranging from June 2015 to June 2049.  This is the one-notch above Fitch’s rating for the tobacco industry, which serves as a cap for its rating of tobacco settlement bonds.

The series 2007 bonds are subordinate to the series 2002 bonds, so redeeming the series 2002 bonds creates value for the series 2007 bonds.

Citi, the lead underwriter for the deal, has negotiated with a holder of the majority of interest in the series 2007 bonds to purchase a portion at $8.50 per $100 of accreted value at stated maturity of the series 2007A tranche maturing in June 2052, according to the prospectus. The total accreted value of this portion is $700 million, so Rhode Island will pay $59.5 million.

Citi has also offered to purchase other two other tranches of the series 2007 bonds, the series 2007B and 2007C, but won’t tender them for cancellation; instead will sell them to the unnamed holder of majority of 2007 bonds. The series B bonds are not entitled to any payment until series A is paid; likewise, the series C bonds are subordinate to the series B. So retiring a portion of the series 2007A creates value for these subordinate bonds.

According to a 2013 report in the Providence Journal, Rhode Island issued $685 million of tobacco settlement bonds in 2002, and these bonds pay interest rates ranging from 5.98% and 6.65%.


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