Ohio Picks Bear, Citi For Tobacco

CHICAGO — Ohio officials overseeing the state’s roughly $5.5 billion tobacco bond sale yesterday named Bear, Stearns & Co. and Citi as the co-book-running senior managers that will lead a team of more than 30 firms underwriting the transaction scheduled for later this year. The Buckeye Tobacco Settlement Financing Authority selected the two from proposals received earlier this month during a competitive selection process. “We chose Citi and Bear Stearns because they are without a doubt the market leaders in tobacco transactions,” state budget director and authority member J. Pari Sabety said after the meeting. Five firms will serve in the role of co-senior managers, including Goldman, Sachs & Co., First Albany Capital Inc., which is being acquired by Depfa Bank PLC, JPMorgan, Merrill Lynch & Co., and Morgan Stanley. Another 18 firms were chosen as co-managers and about 10 that did not meet co-manager qualifications will serve in a selling group.The authority has not yet worked out a designation plan. “We are committed to putting together an underwriting team structure that will provide incentives to achieve the best performance possible out of the market leaders we have chosen to participate,” she added.Sabety said officials aimed to select a diverse team including ones with a strong regional presence. About 10% of JPMorgan’s employees work in the state. At least six co-managers have a “substantial” state presence and at least five are minority-or-women owned. All firms that submitted proposals were included in some role on the syndicate. “We sought to be inclusive and transparent,” Sabety said. The proposals were reviewed by state finance officials working on the tax-exempt transaction along with Public Financial Management Inc. — chosen earlier by the authority as financial adviser on the deal. The authority at a meeting earlier this month named Hawkins, Delafield & Wood LLP as transaction counsel and Squire, Sanders & Dempsey LLP as co-transaction counsel.Gov. Ted Strickland, Treasurer Richard Cordray, and Sabety make up the authority that selected the team based upon the recommendation of the financial team. The bonds are to be secured solely by all of the state’s share in the Master Settlement Agreement struck between 46 states and the nation’s major tobacco companies in 1998.The request for proposals allowed only those firms with experience on tobacco deals to apply. For the senior manager’s spot, firms were required to have experience running the books on a previous tobacco deal of at least $400 million since June 2002. They also were required since July 2002 to have worked on an additional tobacco deal of at least $400 million as a senior manager and experience working on at least one previous negotiated deal for the state as either a senior or co-manager. Co-manager applicants also were required to have served as a senior manager on at least two tobacco deals of more than $400 million.The state remains hopeful of entering the market as soon as October although a leap in yields on tobacco bonds and the widening in credit spreads could influence the sale’s timing and size. When the state began planning the sale earlier this year, tight credit spreads and low long-term yields made selling tobacco bonds a more attractive option. But a recent run-up in yields has left tobacco bond yields at their highest levels since spring 2005. “It is still our goal, but we have just put together our financing team and haven’t begun conversations on the timing or other issues,” Sabety said.Yields on tobacco bonds have been driven up drastically in the past, typically in response to negative developments for the nation’s large tobacco companies, such as the loss of a large class-action suit that heightens the risk of a possible default on MSA payments. The more recent rise in yields, however, has been driven by a general aversion to riskier, asset-backed securities over concerns sparked by problems in the sub-prime mortgage market.The tobacco sale was approved by lawmakers alongside the state’s two-year, $52.4 billion operating budget. About $2.2 billion of the proceeds would finance public school construction commitments of the Ohio School Facilities Commission that otherwise would have been financed between 2008 and 2025 with its share of the MSA payments. The annual payment is about $350 million.Another $1.9 billion would fund other school construction costs and $920 million would finance higher education construction, all of which would otherwise have been funded with borrowing backed by general revenues over the next three years. Ohio would use the $260 million it expects to save annually in debt service for property tax relief for senior citizens and homeowners with disabilities. By foregoing some new debt issuance, the state also will free up some room under its debt ceiling that limits debt service to 5% of total revenues. Officials believe the securitization will protect the current value of the Ohio’s share of the MSA amid pending lawsuits against the tobacco industry and growing efforts at the state and federal levels to raise cigarette taxes to both curtail smoking and raise additional revenue.