Why a state senator is looking to stop N.J. tobacco bond sale

A New Jersey lawmaker is seeking to cancel the state’s $3.2 billion tobacco refunding bond deal, saying the transaction was unconstitutional.

Senate Republican Leader Tom Kean, R-Westfield, sent a letter Monday to acting State Treasurer Elizabeth Maher Muoio to advise that he is exploring legal action to prevent a scheduled April 11 closing of the bonds priced by Jefferies last week. Kean said the final maturity date of 2046 for the New Jersey Tobacco Settlement Finance Corp.’s Series 2018A senior and Series 2018B subordinate tobacco settlement bonds is eight years beyond the state constitution’s requirement that interest and principal be paid and discharged within 35 years. The bonds were first issued in 2003.

“The final permissible payment date is well beyond what is permitted under the New Jersey Constitution,” said Kean in his letter to Muoio, who was appointed treasurer last December following the election of new Gov. Phil Murphy. “If the transaction is to be advanced at all, the issuance should be restructured such that bonds are fully discharged, as the New Jersey Constitution requires, within 35 years of 2003, when Tobacco Settlement Bonds were first issued.”

Kean said in the letter that he is concerned that investors are already selling bonds at a “significant mark-up” just days after the pricing. The final 2046 maturity on the deal, which had triple-B ratings, was priced with a 5% coupon yield of 4.90%. A New York trader told The Bond Buyer Friday that many of the bonds were purchased by mutual funds, insurance companies and hedge funds.

“The Murphy Administration is blatantly ignoring provisions in the New Jersey Constitution that are meant to protect taxpayers from irresponsible debt schemes like this tobacco bond refinancing,” said Kean in a statement. “We are calling for the immediate cancellation of the refinancing and are exploring our legal options to prevent the closing.”

New Jersey Department of Treasury spokeswoman Jennifer Sciortino said Kean’s constitutional claims are “without merit” and that the deal was no different from prior tobacco settlement debt sales. She said the transaction will save New Jersey taxpayers more than $100 million.

“This deal was properly procured and we were advised by bond counsel,” said Sciortino. “After the last administration failed to act, we took swift steps to ensure that these bonds were properly issued.”

Jefferies declined to comment on Kean’s letter or possible legal action against the deal.