Bloomberg News

New York Sells $1 Billion State-Backed Tobacco Debt: Muni Credit

June 28, 2011

June 28 (Bloomberg) -- New York leads this week’s sales with almost $1 billion of tobacco bonds, which carry a state pledge to cover any gaps in principal and interest on payments from the 1998 health-care settlement that backs the debt.

New York Tobacco Settlement Financing Corp. has estimated the $976 million refinancing of bonds issued in 2003 will generate as much as $140 million in savings. The debt, which matures from 2013 through 2018 and carries an AA- rating, may yield 0.6 percentage point to 1 percentage point more than top- rated securities with the same maturities, said John Flahive, Boston-based director of fixed income for BNY Mellon Wealth Management, who oversees $20 billion.

“You’re going to have to give a pretty decent concession for the size, and for the tobacco,” Flahive said in a telephone interview.

Last week, bonds backed solely by payments under the 1998 settlement with 46 states rallied on reports that cigarette makers and state attorneys general agreed to settle a dispute related to market-share losses. About $1 billion held in escrow would be distributed to the states if the agreement is completed, wrote Alan Schankel, director of fixed-income research at Janney Montgomery Scott LLC in Philadelphia, in a June 22 research report.

The reported agreement won’t have much impact on New York’s sale because its tobacco debt trades on the basis of the state backstop, Flahive said.

No Correlation

“It certainly hasn’t traded nearly like the MSA bonds when there’s concern about deterioration of usage,” he said, referring to the 1998 Master Settlement Agreement between the tobacco companies and the states.

“If it didn’t really have that correlation when the MSA bonds were going down I don’t think it’s going to have that much correlation when it’s going up.”

A New York state-backed tobacco bond with a AA- rating maturing in June 2022 traded at an average yield of 2.593 percent on June 23.

By contrast, a Michigan tobacco bond of the same maturity without a state guarantee and rated BBB traded at a yield of 6.843 percent.

New York joins large offerings from Florida’s Citizens Property Insurance Corp. and the Commonwealth of Puerto Rico in in the primary market this week. About $5.3 billion of municipal bonds are slated to be priced this week, about the same amount as each of the previous two weeks, according to data compiled by Bloomberg.

“It’s going to be hit or miss between whether the deals are going to be well received or not,” Flahive said.

Following is a description of a pending sale of U.S. municipal debt:

PUERTO RICO, the Caribbean U.S. commonwealth, will offer $304 million in tax-exempts as soon as today for its Public Improvements Fund. The bonds aren’t yet rated, but the issuer is ranked A3, the fourth-lowest investment grade, by Moody’s, and BBB, the second-lowest investment grade, by Fitch. JPMorgan Chase & Co. will lead the sale. (Updated June 28)

--Editors: Walid El-Gabry, Mark Schoifet

To contact the reporter on this story: Martin Z. Braun in New York at

To contact the editor responsible for this story: Mark Tannenbaum at

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