To cap off New York State's tobacco deals for the millenium, Nassau County recently completed its long-awaited settlement-backed securitization, following a month-long series of postponements related to ratings and bureaucratic issues.

Nassau County's deal was $294 million, with the maximum yield bonds pricing at approximately 663 basis points over Treasurys, roughly 20 basis points wider than the comparable bonds in New York City's $600 million transaction that priced the week prior.

The wider pricing reflected the difference in ratings, said Herman Charbonneau of Roosevelt & Cross Inc., the firm advising Nassau County.

Nassau County's bonds were rated double-A by Moody's Investors Service, compared with the triple-A ratings on New York City's bonds.

"The primary difference between the two transactions is that the New York City transaction had much less leverage," said Michael Kanef of Moody's. "[That means] that the percentage of the amount that could be expected to be received by New York City under any one of a possible volume decline scenarios was smaller, as compared to the Nassau County transaction."

As with any transaction where there is a higher leverage, Kanef explained, there is greater risk.

Another impact deals with the trapping-event structure built into the bonds, where any number of events can trigger a period of trapping. In such a case, the residuals, which would otherwise flow out to the issuer, or the holder of the residual certificate, are captured for the benefit of the transaction. With a higher leverage, the residual amount is correspondingly much smaller, meaning that in a stressful situation, there is less overflow to replenish the transaction.

"In many circumstances [that we tested] where New York City pays off in full, Nassau's transaction defaults," said Kanef. "I don't mean to suggest that this was not a strong deal - our ratings still reflect the belief that the deal will pay off in full; however, we believe it is not as strong a transaction as the New York City deal."

Despite the difference in ratings, the Nassau County transaction went smoothly, Charbonneau added.

"There was good institutional interest in the three term bonds," he said. "And there was also institutional interest in the serial bonds, especially the larger bond size amounts. So the issue was fully subscribed for."

Though spokesmen from both Nassau County and New York City insisted their respective transactions executed as well as expected, some investors said differently, arguing that the deals struggled to get done.

"I don't believe, from what I know, that either New York City or Nassau County really struggled with the distribution process," said Charbonneau. "It is true that sales to retail accounts were very limited, simply because it is a complex issue, and it's hard to explain to lots of retail accounts.

"The range of the institutional investors who bought Nassau County was probably somewhat less than you'd see for a normal $300 million issue, but they were in there for big-block buys," Charbonneau explained. "So maybe the market wasn't as broad, in the sense of the number of participants and in terms of what people are seeing for bonds of this size, but those who were buying were buying it in good amounts, and they were able to take care of the issue.

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