OppenheimerFunds Inc.'s complaint against Rhode Island's tobacco deal may garner the sympathy of the market, but the market is unsure of its viability in court.
Earlier this week, Citigroup, the lead underwriter behind the nearly $600 revenue refunding deal, placed the issuance on day-to-day status pending a lawsuit from two Oppenheimer Rochester municipal funds who challenged the new deal. The preliminary official statement outlined that the Series 2014 bonds would refund the state's 2002 tobacco bonds in their entirety and part of the outstanding 2007 bonds, which were previously subordinate to the 2007 debt.
The new issuance would transfer the seniority of the 2002 bonds over the 2007s to the newly issued 2014 bonds, but also included a $20 million payment to the state, which OppenheimerFunds objected to.
"Oppenheimer has a good case; they've been screwed," said a tobacco analyst based in the Southeast. The analyst requested anonymity as he was involved in the matter. "The state may have found a loophole and they're benefitting from it."
However, just because OppenheimerFunds has a good case, does not mean it will hold up in court. Other states have found loopholes to further benefit from their tobacco payments and refunding old debt, including New Jersey earlier this year.
The deal raised questions as to why the state would receive a $20 million payment instead of refunding the 2007 holders in their entirety, said the analyst. While the structure is unfair, it may be perfectly legal.
"On a legal technicality, Oppenheimer may be out in the cold," the analyst said. "As a practical matter, Rhode Island very well may win this case."
The Garden State reached a deal in March to refund its capital appreciation bonds (CABs) in exchange for a one-time cash infusion of $91.6m into its general fund. Critics of the deal called it "financial gimmickry" as the CABs were zero coupon and tripled in value following the transaction, said the analyst.
As more states look for ways to relieve stress on their balance sheets, many think that loopholes like in New Jersey and Rhode Island will be common place for tobacco debt refundings, agreed the southeast analyst and a New York based trader.
"States need help and they're looking for loopholes," said the New York based trader. "Does Oppenheimer make a good point? Absolutely. Will it hold up in court? I'm not sure."
Friday's secondary market continued strengthening, with strong bids for a variety of credits across sectors, regions, and durations, said a New York based trader. Despite some concern surrounding its issuance earlier this week, the Connecticut State GO strengthened on Friday, with yields on the 5s of 2023 tightening to 2.33% from 2.37%, according to data provided by Markit.
Across the country, trading was bright for the Golden State. Yields on State of California various purpose GOs also strengthened, with the 5s of 2043 contracting to 3.60% from 3.36, according to Markit. The state of Wisconsin also strengthened, with its GO 5s of 2023 falling to 2.25% from 2.29%, according to Markit.
The overall market continued its three day rally on Friday, strengthened across the curve, according to Municipal Market Data. The short end of the curve remained unchanged while bonds maturing between 2018 and 2022 saw bumps between two and three basis points. Beyond 2023, yields fell between three and four basis points.
The 10-year benchmark closed at 2.415%, tighter than yesterday's 2.424%.
Investors pointed to a strong rally in treasuries to explain the muni market's strength in recent trading days. Treasuries have been on a week-long streak following global tensions in the Eastern Europe and the Middle East that have cased investor to pile into the asset class.
Treasuries mostly rallied even further on Friday, and most notably on the long end of the curve where the 30-year fell nine basis points to 3.232% from yesterday's close. The 10-year fell just one basis point while the two-year note actually rose a basis point to 0.45%.
