In addition to New York City, there are a number of counties across New York State that will begin losing access to millions of dollars in annual revenues starting next spring because of the structure of their tobacco bond deals.
The counties include Nassau, Westchester, Monroe, Erie, Niagara, Ulster, Rockland, and Rensselaer. In addition, a number of other counties participated in two pooled New York county tobacco deals.
As a result of the unexpected budget hit, which was triggered by the hard and fast fall in tobacco company credit quality, some of those counties could follow New York Citys lead and begin reviewing a restructuring of their tobacco debt.
The impact on the underlying credit of the issuers depends on the structure of their tobacco bond deals, said Robyn Kapiloff, an analyst at Moodys Investors Service. It varies [from issuer to issuer] whether it will be a short-term event or a long-term event.
In all, New York City, the New York counties, Iowa, and the District of Columbia, have sold nearly $4 billion in tobacco bonds that are structured with so-called trapping mechanisms. The mechanisms were built into early tobacco bond deals to provide additional security to bondholders, requiring the issuer to fund additional reserves if tobacco company credit quality fell below investment grade.
This summer, the traps were triggered when Moodys downgraded R.J. Reynolds Tobacco Co. to Ba1.
The reserves, called trapping accounts, are funded with the money left over after the issuers of the tobacco bonds pay their debt service. For some issuers, such as New York City, the impact is large because there is a lot of money left over after debt service.
Instead of budgeting the residual and spending it, the city must now use a large chunk of it to start building up a significant trapping account for the bondholders. For others issuers that securitized almost their entire share of the tobacco settlement, the impact is smaller.
In the case of New York City, $240 million in tobacco company payments are expected in April. The city will use $125 million for debt service on the $1.3 billion in tobacco bonds it has sold. Before the trap was triggered, it had planned to spend the $115 million residual.
According to its indenture, New York City now must put 35% of the $1.3 billion in principal in a trapping account, totaling $325 million. It will begin funding the account in April by diverting around $53 million out of the $115 million it had been expecting to spend in the fiscal 2004 budget.The city said Monday that it would begin exploring ways to restructure the $1.3 billion in tobacco bonds, as opposed to diverting needed revenues into a trapping account.
A number of New York counties find themselves in similar circumstances. For instance, Westchester County has had to reallocate $11 million from its $1.2 billion fiscal 2004 budget to a trapping account for the $103.5 million in tobacco bonds it sold at the end of 1999. Its a big impact on the county budget, said Peter P. Pucillo, the countys commissioner of finance.
In Nassau County, the situation is different, because the county securitized almost all of its tobacco settlement when it sold $294.5 million in bonds at the end of 1999. As a result, as a result of the trigger it has had to reallocate only $2.9 million in residual payments expected in April.
The varying degrees of impact could affect which issuers seek to restructure their outstanding debt.
We have to evaluate whether it is in the countys interest, said Nancy Winkler, managing director at Public Financial Management, Nassaus financial adviser. Clearly it looks like New York City has a particular benefit they would derive. It does not appear to be the same situation in Nassau. Its really not affecting the budget in any material way.
However, Winkler added, We continue to evaluate every aspect of the countys significant debt portfolio.
