A rare tobacco bond deal out of New York hits the market Thursday.
The New York Counties Tobacco Trust VI is selling $292.16 million of Series 2016 tobacco settlement pass-through bonds, marking the first issuance by the entity since 2005. The bonds, which are being priced by Jefferies, carry ratings from S&P Global Ratings ranging from A for the shorter maturities out to BBB on the longer end.
"The results of our cash flow stresses for the bonds maturing after June 2026 are strong and can quantitatively support a higher rating level," said S&P analyst Christine Dalton in a Sept. 1 presale report. "However, a longer time horizon to legal maturity (more than 10 and 20 years) increases the uncertainty of our projections and the potential for event risk in the tobacco industry and in tobacco securitizations."
The bonds include tobacco settlement monies owed to five New York counties: Broome, Dutchess, Onondaga, Rensselaer and Ulster. Dalton noted that the bond ratings factored in the credit quality of the two largest participating tobacco manufacturers in the deal, Altria Group Inc., a parent of Philip Morris USA Inc. and Reynolds American Inc., a parent of R.J. Reynolds Tobacco Co.
Richard Larkin, director of municipal credit analysis at Stoever Glass & Co., said there are general risks for tobacco bonds due to national consumption declines averaging around a 4% dip a year. He stressed though that New York tobacco bonds are safer largely due to a $550 million settlement the state reached last year with major tobacco companies under the 1998 Tobacco Master Settlement Agreement.
"New York tobacco bonds are probably the safest," said Larkin. "Because New York State got basically a full refund from disputed payments in the [nonparticipating manufacturers] account, with little likelihood that future MSA payments will be challenged, cash flows for New York State and locals should be enough to retire all New York State, New York City and county tobacco bonds."
