Louisiana Refunds Market-Beating Tobacco Bonds: Muni Deal

Louisiana is refinancing $638 million in bonds backed by tobacco company payments as such debt is beating the broader $3.7 trillion muni market this year.

This week’s sale by the Tobacco Settlement Financing Corp., which is refunding securities sold in 2001, is backed by the revenue from a 1998 settlement between cigarette companies and U.S. states to cover health-care costs resulting from smoking.

Louisiana officials approved the refinancing last month to take advantage of historically low interest rates, according to a statement from Kristy Nichols, administration division commissioner. During June, municipal-bond yields have climbed to near a two-year high as equities rallied and the Federal Reserve plotted an end to its quantitative-easing program in 2014.

“We are continuing to monitor market conditions in terms of timing and the precise amount of savings, and will proceed in a way that’s in the best interest of the state,” Michael DiResto, a Nichols spokesman, said by e-mail. “We look forward to strong investor interest in the bond sale despite the difficult market conditions these past several weeks.”

Fitch Ratings gives the debt a BBB+ grade, the best it grants on tobacco bonds and seven steps below top level securities. Fitch said it expects that even if tobacco companies enter bankruptcy, the payments to states would continue “because stopping would put them at the risk of litigation.”

Ratings Rationale

Standard and Poor’s rates the securities maturing in 2016 through 2023 A, or five steps below top grade; those due in 2024 through 2033 A-, one level lower; and the 2035 maturity BBB+. The ratings reflect the likelihood of timely payments, tobacco company credit quality, the deal’s structure and the presence of about $57.3 million in a liquidity reserve account, S&P said.

The 1998 accord that 46 states struck with Phillip Morris USA, Reynolds American Inc. and Lorillard Inc. required the companies to pay more than $200 billion to resolve their liability in litigation over health costs related to smoking. About $101 billion of municipal debt is backed by the payments, which are based on cigarette shipments.

Tobacco munis produced a 0.48 percent year-to-date total return through June 20, compared with a 2.13 percent loss for the broad muni market, according to Barclays Capital indexes.

A Louisiana tobacco bond maturing in May 2039 traded June 21 at an average yield of 5.88 percent, with the spread averaging 2.16 percentage points over benchmark munis of the same maturity, according to data compiled by Bloomberg. On Jan. 2, the tobacco bond had an average yield of 3.73 percent, a risk premium of 1.03 percentage points.

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