US: Oppenheimer Funds Fighting Tobacco Bond Refinancing

Source from:  Providence Business News 12/09/2014

When American tobacco companies settled a landmark lawsuit over the harmful health effects of their products 16 years ago, many state and local governments cashed in immediately on payments supposed to last generations.

They sold tobacco bonds against future payments that some critics claim benefited the financial industry more than the public.

But in Rhode Island's case, a mutual-fund giant is claiming that it's being taken to the cleaners by the state with a $600 million refinancing plan that was expected to generate $20 million in cash for the state this fiscal year.

In a lawsuit filed in R.I. Superior Court, two mutual funds controlled by Oppenheimer Funds are trying to block the tobacco bond refinancing, which they claim defrauds their investors.

As a result of the lawsuit, a bond issue that had been slated for August has been put on hold pending a resolution and the upfront revenue it would have generated is not there to help officials close a projected budget gap.

The merits of the case will likely depend on an interpretation of dense financial disclosures issued with the old bonds and contained within a five-inch thick stack of printed exhibits in Oppenheimer's complaint.

Regardless of how it turns out, the case provides a window into the complicated world of tobacco bonds and how at least one state is using them.

Rhode Island issued its first tobacco bonds in 2002, four years after the historic settlement was signed and the country's four major tobacco manufacturers agreed to pay 46 states at least $206 billion over 25 years.

The settlement required the companies to make annual payments to the states that depended on how much tobacco they sold the year before.

Although the structure of tobacco bonds and motivations behind them differed from location to location, the most common rationales were that they would shift risk to investors and provide upfront cash to plug budget holes.

The attractiveness of short-term money instead of future revenue was obvious and the desire to shift risk grew out of the possibility that smoking-cessation programs would be successful and tobacco sales driving the payments would dry up.

As it turned out, to some extent that's what has happened.

Smoking has decreased and because only settlement revenue can be used to pay the bonds, they've been paid down more slowly than projected. In fact, some bonds sold more recently and subordinate to earlier bonds have been written down out of a high likelihood they will never be fully paid. Enditem