Oppenheimer Sues Rhode Island Over $594 Million Bond Deal

Rhode Island’s plan to sell $594 million in debt backed by tobacco-company payments was challenged by OppenheimerFunds Inc., which claims the deal violates earlier bondholder rights to revenue related to a 16-year-old accord over health-care related costs.

Rhode Island intends to refinance securities backed by funds from the tobacco settlement and issue new debt, according to bond documents. The deal was originally scheduled to price yesterday, according to data compiled by Bloomberg. Its status is now considered day-to-day, Thomas Mullaney, Rhode Island’s budget officer, said in an e-mail.

OppenheimerFunds, according to a copy of a complaint, asked a state court judge in Providence, Rhode Island, to rule that the plan to allegedly divert at least $20 million from prior bondholders is illegal because the state can’t change the order in which the holders are paid. The filing dated Aug. 4 couldn’t immediately be confirmed in court records.

In a 1998 accord, tobacco companies agreed to pay 46 states for their expenses associated with smoking-related illnesses. Rhode Island created the Tobacco Settlement Financing Corp. to raise money from the deal, selling bonds backed by future settlement revenue in exchange for an upfront payment.

The corporation sold bonds to investors in 2002 and again in 2007 based on the promise of repayment from that revenue, according to the complaint.

‘Siphon’ Revenue

Oppenheimer, which said it holds all of the corporation’s 2007 series C bonds and about a third of its 2007 series B bonds, said the corporation “seeks to siphon off” revenue earmarked for those bondholders and give it to the state. The contemplated 2014 bond issue would enable Rhode Island to “leapfrog over” a subordination structure established with the prior sales, according to the funds.

“We believe it is our responsibility to stand up for the rights of bondholders and our shareholders when the unlawful acts of issuers or others threaten those rights,” the firm said.

Scott Helfman, a spokesman for New York-based Citigroup Inc., the lead underwriter for the new bonds, declined to comment on the sale.

Rising taxes and increased regulation may curb payments made by cigarette companies to states, according to bond documents. Domestic cigarette shipments fell 4.9 percent last year, the steepest drop since 2010, according to data from the National Association of Attorneys General.

There is less risk associated with falling sales in this deal given its “ability to withstand an approximately 8.3 percent year-over-year decline in cigarette shipments,” Standard & Poor’s said in a report.

The lawsuit is Oppenheimer Rochester High Yield Municipal Fund v. Tobacco Settlement Financing Corp., 14-3857, State of Rhode Island Superior Court.

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