A soon-to-price bond deal securitizing the spoils from lawyers that won the landmark 1998 tobacco legal settlement should inaugurate a multi-billion issuance boom of tobacco-related deals this year.
Officials at Deutsche Banc Alex. Brown, which wrested the legal-fee deal mandate from Morgan Stanley Dean Witter last summer, are readying the deal to hit the Street possibly by the end of the month. Because the deal will be a privately placed transaction, information about pricing and size remained sketchy as of press time.
The deal is notable because it is the first-ever taxable bond offering to emerge from the legal settlement between the four major cigarette manufacturers and 46 states. It has been anticipated for more than a year. To date, all tobacco deals have been tax-exempt bonds issued by state or local governments and have traded in both the municipal bond market and the asset-backed securities arena.
The lawyers' slice of the tobacco settlement pie could be as appealing, if not more alluring, than the governments'. At least $8 billion in legal fees were awarded to lawyers representing Texas, Florida and Mississippi, and at least $20 billion in overall fees have been awarded. Further, it is less likely that the legal fee deals will face the same amount of scrutiny as government tobacco deals have had. While a government could have trouble getting its money, a lawyer likely will not, quipped a source involved in tobacco securitization.
The legal-fee deal mandate is a major win for Deutsche, as it puts the bank in the catbird seat for further tobacco lawyer securitizations down the road. While Morgan Stanley had originally won the mandate last year, disagreements between the legal firms and the underwriter about the deal structure provided an opportunity for Deutsche to come in and poach the mandate.
Indeed, bankers are now canvassing the overall tobacco securitization market, each trying to win territory. Salomon Smith Barney, Lehman Brothers, Merrill Lynch & Co. and even smaller-tier players like M.R. Beal & Co. are all set to bring government tobacco settlement bonds to market this spring.
A Tobacco Harvest
The deals all originate from the 1998 Master Settlement Agreement between cigarette manufacturers and the states in which local lawsuits were consolidated in favor of a broad national-based settlement. The settlement requires manufacturers to make annual payments totaling about $206 billion through 2025, and follows earlier individual settlements with four states - Mississippi, Florida, Texas, and Minnesota - that totaled more than $40 billion over the next 25 years, according to Stephen Redhead, a specialist in the domestic social policy division of the National Council for Science and the Environment.
Thus it was no surprise that analysts predicted 2000 would be a banner year for tobacco settlement securitizations, as the state governments began receiving their share of the payments and were thought to be eager to securitize. Analysts predicted up to $10 billion in deal issuance last year.
The market, however, fell flat. Only $1.3 billion in tobacco deals priced last year, and only from a few counties in New York state and Alabama, Alaska and Puerto Rico. The slump was due to a number of reasons, including a generally volatile bond market throughout the year, a distaste for the bonds in secondary trading and intermittent signs that the Internal Revenue Service would revoke the tax-exempt status of the bond programs.
Those problems have been quelled for the time being. The IRS recently informed New York City its tobacco bond program was in the clear, and will likely soon give the green light to outlying counties in New York. Yet expectations have been chastened. Analysts call for $4 billion in new deals this year despite indications that a much higher volume could price.
One hotbed of activity is California. Because California was unique in that many of its local governments each hired private attorneys, the settlement is being sliced and diced much more finely than in other states where rewards were given on a statewide or consolidated county basis. At least $1.5 billion in tobacco bonds could emerge from the state in the next year, analysts said.
Salomon has already won the largest debt issue, a $500 million deal from the California Statewide Tobacco Securitization Corp., an amalgam of 24 counties. Merrill Lynch has nabbed a $460 million deal from San Diego county and PaineWebber Inc. has won a few smaller mandates from Sonoma and Stanislaus County.
Larger game is to be found on the East Coast, as New York City plans to hit the market with a second tobacco deal in April, estimated to be $700 million, while Washington D.C. is also planning to come with a roughly $500 million bond.