Illinois Tobacco Bonds May `Fly' as Yields Prove Attractive: Muni Credit
Illinois began taking orders from individuals on $1.46 billion in municipal bonds backed by tobacco settlement payments to help meet $2 billion in outstanding bills.
States and municipalities are poised to borrow about $13.3 billion this week, the second-highest weekly total this year, according to data compiled by Bloomberg. The so-called Railsplitter Tobacco bonds are the week’s largest issue and the state’s biggest tax-exempt borrowing since a $1.5 billion refinancing deal in February.
Illinois is issuing a maximum maturity of 17 years compared with 38 years for a similar bond sold in 2008 by Suffolk County, New York. That will limit risk to investors, said Richard Larkin, director of credit analysis at Herbert J. Sims & Co. in Iselin, New Jersey, which manages $1 billion in debt. The Railsplitter sale is secured by payments from a 1998 settlement with tobacco companies, preliminary offering documents show.
“This deal will fly,” Larkin said. “It’s structured very conservatively. It’s a relatively short bond with a sweet yield.”
Bonds maturing in June 2027, about $317 million of the issue, were offered to individual investors today at a 6.25 percent yield, according to a person with direct knowledge of the sale. That’s about 250 basis points above top-rated debt, according to a 17-year BVAL benchmark index. The so-called retail period will continue today, with sales to institutional investors such as insurance companies and mutual funds tomorrow.
‘Strong’ Demand
Initial demand for the securities during marketing was “strong,” according to John Sinsheimer, Illinois director of capital markets. The bond was structured to have full debt- service coverage for 17 years even if tobacco shipments continue to shrink, he said.
“Tobacco shipments can fall 10 percent year after year and we will be fully funded,” said Sinsheimer. “A 10 percent decline has never happened.”
The compound annual rate of decline since 1997 has been about 4.2 percent, with a 9 percent drop in 1999 and an 8.6 percent fall last year, according to data from the U.S. Treasury’s Alcohol & Tobacco Tax and Trade Bureau.
Larkin, who has predicted defaults of previous tobacco bonds because of the growing unpopularity of smoking, said he has told his traders to consider these if they become available.
“It’s the best structured tobacco bond I have seen since they came out,” Larkin said. “I told my traders that if they become available, it’s a good bond.”
Outstanding Liability
The state has been the recipient of $3.3 billion of tobacco settlement payments, preliminary offering documents show. Proceeds from this sale, rated A- by Standard & Poor’s and BBB+ by Fitch Ratings, fourth- and third-lowest, will help the state pay its fiscal 2010 bills by Dec. 31.
Comptroller Dan Hynes warned in an October report that failure to sell the bonds and collect other short-term revenue may make it hard to meet the deadline to eliminate $2 billion of 2010 debt. The 2011 fiscal year began July 1 and Illinois has a “lapse” period to settle outstanding liability before Dec. 31.
The urgency to get the deal done has helped boost yields, as the state needs to price “aggressively” to clear the market, said Matt Dalton, chief executive officer at Belle Haven Investments Inc. in White Plains, New York, which has $450 million in municipal assets.
Yields on AAA rated debt due in 17 years fell 2 basis points to 3.73 percent, the lowest since Nov. 15, according to a Bloomberg Valuation index. Yields fell at most maturities, BVAL indexes show, with about $275 million of the week’s total pricing yesterday.
Following are descriptions of pending sales of U.S. municipal debt:
AMERICAN MUNICIPAL POWER INC., a Columbus, Ohio-based supplier to public electric systems, tomorrow will sell $667 million in revenue-backed tax-exempt and taxable bonds, including $605 million in Build America Bonds. The issue will finance a 105-megawatt hydroelectric power plant at an existing dam on the Ohio River, according to an S&P report. Underwriters led by Wells Fargo will market the securities, which are rated A, sixth-highest, by S&P. (Updated Nov. 30)
LOS ANGELES DEPARTMENT OF WATER & POWER, the largest U.S. municipal utility, plans to sell $493 million in taxable Build America Bonds today. The securities, backed by water system revenue, will fund ongoing capital improvements, according to a Fitch report. JPMorgan Chase & Co. will lead the marketing of the issue, which Fitch rates AA+, second-highest and one level above Moody’s rating, Aa2. (Updated Nov. 30)
NEW YORK STATE URBAN DEVELOPMENT CORPORATION, which facilitates the development of affordable housing for low, moderate and middle-income people, will sell $1.1 billion in tax-exempt and taxable bonds, including $349 million in Build America Bonds. The securities, backed by state income tax revenue, will finance state facilities and economic development projects. Morgan Stanley will market the tax-exempt portion and Citigroup will market the taxable securities, which are both rated AAA by S&P’s. (Added Nov. 30)
PORT AUTHORITY OF NEW YORK AND NEW JERSEY, which owns the World Trade Center site and runs the three biggest New York-area airports, will sell $840 million in tax-exempt bonds today. The issue will fund expansion of JFK International’s Terminal Four, according to a Fitch Ratings report. Citigroup will market the issue, which is rated Baa3 by Moody’s and BBB- by S&P, both one level above junk, and BB by Fitch, second-highest speculative grade. (Updated Nov. 30)
CHICAGO, the third-biggest U.S. city by population, tomorrow plans to sell $804 million in tax-exempt and taxable general obligation bonds, including $214 million in Build America Bonds. The securities will refinance existing debt and fund street, sidewalk and gutter improvements, demolition of dilapidated buildings and contributions to the city’s pension funds. Chicago postponed the sale from mid-November for more favorable borrowing costs. Underwriters led by Loop Capital Markets LLC will market the issue, rated Aa3 by Moody’s, its fourth-highest investment grade. (Updated Nov. 30)
To contact the reporters on this story: Brendan A. McGrail in New York at bmcgrail@bloomberg.net; Darrell Preston in Dallas at dpreston@bloomberg.net.
To contact the editor responsible for this story: Mark Tannenbaum at mtannen@bloomberg.net
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