Legislature(2005 - 2006)SENATE FINANCE 532
04/12/2006 08:00 AM Senate FINANCE
| Audio | Topic |
|---|---|
| Start | |
| SB243 | |
| SB231 | |
| SB235 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | SB 305 | TELECONFERENCED | |
| += | SB 243 | TELECONFERENCED | |
| *+ | SB 231 | TELECONFERENCED | |
| + | TELECONFERENCED | ||
| = | SB 235 | ||
8:05:47 AM SENATE BILL NO. 243 "An Act relating to the financing of construction, major maintenance, and renovation of facilities for the University of Alaska; relating to the financing of construction of a correctional facility; authorizing the commissioner of revenue to sell the right to receive a portion of the anticipated revenue from a tobacco litigation settlement to the Northern Tobacco Securitization Corporation, with the proceeds of that sale to finance construction, major maintenance, and renovation of facilities for the University of Alaska and to finance the construction of a correctional facility; providing for the establishment of funds for deposit of those proceeds; authorizing the issuance of bonds by the Northern Tobacco Securitization Corporation for the purpose of acquiring the right to receive a portion of anticipated revenue from a tobacco litigation settlement; and providing for an effective date." 8:05:51 AM This was the second hearing for this bill in the Senate Finance Committee. Presentation by citigroup on Tobacco Bond Issuance DALE ANDERSON, citigroup/ Smith Barney, introduced the presenters. Citigroup is the leader in tobacco settlement securitization and has been involved since 1999. 8:07:53 AM TIM RATTIGAN, Regional Banker for Northwest and Alaska, citigroup, introduced Mr. Haddon. 8:09:18 AM JIM HADDON, Managing Director of Tobacco Securitization, citigroup, gave a presentation utilizing a packet titled, "Presentation to: The State of Alaska, Tobacco Settlement Revenue Securitization Update, April 12, 2006" [copy on file]. References are not all made in sequential order. 8:09:28 AM Page 4 Completed Tobacco Securitizations 71 completed issues totaling over $34 billion in par amount since 1999. [US map highlighting the dates, amounts and percentages of Securitizations Completed, Securitization Pending, and Legislation Introduced status of states, US territories, counties and cities. Notations indicate that a percentage of the Tobacco Settlement Receipts (TSR) generated by the states of California and New York are allocated to counties and certain cities. Amounts or percentages of TSR are pledged for the states of Alabama, Arkansas and North Dakota. States not a party to the Master Settlement Agreement (MSA) are identified.] Mr. Haddon outlined the information on this map. 8:10:11 AM Page 5 Secondary Market Trading (2003 - 2006) [Line graph showing Secondary Market Trading and Yield (%) of the 5.5 percent Northern Tobacco Securitization Corporation Series 2001 Maturing 2029, and the 30-Year MMD "AAA", for selected months from March 2003 to March 2006. Pertaining legal actions are noted on the timeline, as well as the dates bond raters downgraded unenhanced tobacco securitization bonds. A notation reads, "Yields calculated as volume-weighted averages based on MSRB daily trading data."] Mr. Haddon stated this graph is indicative of the status of the yield in the current market of the Alaskan bonds issued in 2001 and maturing in 2029. Mr. Haddon pointed out the 200 basis point change in tobacco rate yield variations from 8.5 percent to 5.5 percent between March 2003 and March 2006. This is a "very event risk" market that is subject to media reports of consumption, significant "factor determination concerning nonparticipating manufacturer adjustment", and litigation against the industry. These occurrences cause the market to fluctuate as the market evaluates the security. Mr. Haddon noted the 30-year AAA MMD provides a baseline market analysis. "Rates have drifted down in tobacco" and therefore now is an opportune time to consider a tobacco securitization. 8:11:52 AM Senator Dyson requested the witness explain acronyms as they are used in the presentation. 8:12:12 AM Mr. Haddon defined "triple A" as the highest credit rating possible, 30-year as the term of maturity, and MMD as Municipal Market Data. Secondary market trading reflects the buying and selling of the Alaska Northern Tobacco Securitization Corp bond issued in the year 2001. 8:12:45 AM Mr. Rattigan furthered the amount the State pays for the securitization on the bonds is not impacted. That rate was set at the date of issuance in 2001. This information reflects activity in the secondary market as buyers and traders are selling and buying the bonds after the initial offering. 8:13:12 AM Page 6 2005 Tobacco Market Overview · In 2005, the market for tobacco securitization bonds continued to be shaped by three primary factors: o Large cash positions of high-yield / tobacco investors o Market supply of various types of high-yield bonds o Investor perception of tobacco industry creditworthiness, litigation risk, and consumption risk · In early 2005 (after a year with no tobacco securitization issuance), large cash positions of tobacco investors (specifically, municipal high yield funds) and an improving litigation environment provided a favorable backdrop for new tobacco securitization issuance · At the end of 2005, we witnessed a softening secondary market, with decreased tobacco trading volume occurring o Less hype over potential tobacco refundings o Investors somewhat more credit cautious given the developments in the Grand River case Thirteen tobacco securitizations were completed in 2005 for a total of $6.1 billion in par amount. · $4.5 billion refunding · $1.6 billion new money And Page 7 2006 Tobacco Market Outlook · New tobacco securitization issuance has continued in 2006, and there is a building forward calendar · Cash positions in high yield funds remain robust, and we believe demand continues to exceed new supply. This was witnessed in the successful sale of $1.75 billion of tobacco securitization bonds during the week of January 30 alone, and an additional $530 million brought to market year-to-date · Institutions who have approved the tobacco credit continue to be buyers, and favorable yields and market outlook continue to attract new investors · Despite recent developments regarding the Brattle Group's determination in the NPM Adjustment process, investors appear relatively comfortable in the current market environment, and market volatility has been minimal · Tobacco market conditions and investor demand remain favorable Over $2.2 billion of unenhanced tobacco securitization bonds have been issued year-to-date. · $1.6 billion refunding · $600 million new money Currently, litigation and NPM (Non-Participating Manufacturer) Adjustment risk are the most significant credit concerns in the tobacco securitization market. Mr. Haddon stated that no tobacco securitizations were completed in 2004 due to significant litigation underway involving the State of Illinois and Phillip Morris, Inc. A $13 million judgment was assessed against Phillip Morris in this case. As a result the company threatened to file bankruptcy proceedings, which caused volatility in the market. The market improved in 2005 and rates dropped. Several deals were made in 2005, as buyers became more interested in tobacco securitization bonds. The improvements continued in 2006. 8:14:35 AM Page 8 Recent Secondary Market Trading (February - April 2006) [Line graph showing Yield (%) of 5.5% Northern Tobacco Securitization Corporation Series 2001 Maturing 2029, Recent "BBB" Rated Tax-Exempt Capital Appreciation Bond Pricing, and 30-Year MMD "AAA", for various dates between February 1, 2006 and April 5, 2006. Pertinent events are indicated. A notation reads, "Yields calculated as volume- weighted weekly averages based on MSRB daily trading data.] Mr. Haddon noted the minimal volatility of the market in 2006 not withstanding issues involving a potential Non-Participating Manufacturers (NPM) Adjustment. He explained this pertains to whether the Master Settlement Agreement (MSA) was a significant factor in the market share loss of the Participating Manufacturers (PMs). The Brattle Group, an econometric firm, has been examining this matter and released a preliminary report on March 2 opining that the MSA was a significant factor. On March 27 the final report was issued. Despite this, the market conditions are favorable for issuers. 8:15:56 AM Page 19 NPM Adjustment: Overview · The Non-Participating Manufacturer (NPM) Adjustment, measured by domestic sales of cigarettes by NPMs, operates to reduce the payments of the Participating Manufacturers ("PMs") under the Master Settlement Agreement ("MSA") in the event that the PMs incur losses in market share to NPMs during a calendar year as a result of the MSA · Three conditions must be met in order to trigger an NPM Adjustment for one or more Settling States: o (1) the aggregate market share of the PMs in any year must fall more than 2% below the aggregate market share held by those same PMs in 1997 (a condition that has existed for every year since 2000) o (2) a nationally recognized firm of economic consultants must determine that the disadvantages experienced as a result of the previsions of the MSA were a significant factor contributing to the market share loss for the year in question, and o (3) the Settling States in question must be proven to not have diligently enforced their Model Statutes · The NPM Adjustment is applied to the subsequent year's Annual Payment and Strategic Contribution Payment and the decrease in total funds available as a result of the NPM Adjustment is then allocated on a Pro Rata basis among those Settling States that have been found: o (i) to have not diligently enforced their Model Statutes, or o (ii) to have enacted a Model Statute or Qualifying Statute that is declared invalid or unenforceable by a court of competent jurisdiction · The MSA provides that the amount of an NPM Adjustment applied to any Settling State in any given year cannot exceed the amount of Annual and Strategic Contribution Payments to be received by such Settling State in such year. The market for tobacco securitization bonds may be affected in upcoming months by recent developments relating to the "NPM Adjustment". Mr. Haddon informed that the NPM Adjustment could potentially impact Alaska on two levels: the amount received in the payment due April 17, 2006, and the condition of the bonds already issued as well as the 20 percent of the settlement not securitized. Mr. Haddon explained the NPM Adjustment. A tobacco manufacturer has two options: join the MSA, or be a NPM and submit an escrow payment to the State based on the amount of cigarettes sales made in the state. He outlined the conditions in which a NPM Adjustment could be made, which could decrease the amount of the payments the PMs must remit. Mr. Haddon informed that the PMs have begun a procedure to achieve a NPM Adjustment. A greater than two percent market share loss since 1997 has occurred and subsequently, PMs could withhold a portion of their payments due in April or make the full payment and seek a NPM Adjustment for future payments. Mr. Haddon also noted the determination must be made as to whether the State diligently enforced the MSA. A standard of diligent enforcement has yet to be established and would require either a court decision or binding arbitration. The PMs favor binding arbitration, while the Settling States prefer court involvement. Meanwhile, the manufacturers must decide whether to withhold partial payment. Mr. Haddon reported that the market was "very concerned about this", although the market has not shown significant volatility as a consequence of these possible occurrences. 8:19:44 AM Page 21 NPM Adjustment: Recent Developments · In May 2004, the Settling States and the PMs selected The Brattle Group as the firm of economic consultants responsible for making the "significant factor" determination regarding the Market Share Loss of the PMs for calendar year 2003 · On March 2, 2006, the Brattle Group issued its preliminary finding that the MSA was a significant factor contributing to the Market Share Loss of the PMs for calendar year 2003 (the preliminary determination was challenged by the Settling States and additional arguments/information were submitted to The Brattle Group for consideration in connection with its final decision) · On March 27, 2006, The Brattle Group announced its final determination that the MSA was a significant factor contributing to the Market Share Loss of the PMs for calendar year 2003 · If the Original Participating Manufacturers ("OPMs") claim an NPM Adjustment for 2003 in April 2006, such OPMs may either make an appropriate deposit into the Disputed Payments Account or withhold payment reflecting the claimed NPM Adjustment, which could have a materially adverse impact on the available amount of tobacco settlement revenues ("TSRs") flowing to Settling States · The Settling States have reserved the right to commence an enforcement action for compliance with the MSA. It has been reported that a majority of the Settling States have sent a notice to the PMs of their intent to commence such an action, including an action seeking a declaratory order that regardless of the "significant factor" determination, the PMs are not entitled to an NPM Adjustment because those Settling States have been diligently enforcing their Qualifying Statutes There can be no assurance as to the amount of any NPM Adjustment or the corresponding reduction in TSRs payable to the Settling States. Mr. Haddon shared that Phillip Morris submitted its payment in advance of the April deadline. That manufacture occupies over 50 percent of the marketplace. RJR has submitted a partial payment and whether final payment would be withheld is unknown. 8:20:24 AM Page 22 NPM Adjustment: April 2006 Payment · Assuming no NPM adjustment, the April 2006 payment due has been reported to be approximately $6.5 billion · The OPMs have requested the Independent Auditor for the MSA to reduce its calculation of the expected 2006 payment by $1.14 billion plus interest (approximately $1.2 billion total) to account for the NPM Adjustment for 2003 o Assuming a $1.2 billion NPM Adjustment, the impact to TSRs flowing to the State would be as follows: Assumed NPM Adjustment: $1.2 billion State Allocation Percentage: 0.3414187% Decrease in Total TSRs Flowing to the State: 100.000%: $4,097,024 Decrease in Amounts Available for Series 2000 Bonds: 40.000%: $1,638,810 Decrease in Amounts Available for Series 2001 Bonds: 40.000%: $1,638,810 Decrease in Non-Securitized TSRs: 20.000%: $819,405 · On March 31, Philip Morris reportedly made a full payment; RJR made a partial payment o Assuming Philip Morris' share was approximately 50%, this would suggest an NPM Adjustment of up to $600 million; in this case, the impact to TSRs flowing to the State would be as follows: Assumed NPM Adjustment: $1.2 billion State Allocation Percentage: 0.3414187% Decrease in Total TSRs Flowing to the State: 100.000%: $4,097,024 Decrease in Amounts Available for Series 2000 Bonds: 40.000%: $1,638,810 Decrease in Amounts Available for Series 2001 Bonds: 40.000%: $1,638,810 Decrease in Non-Securitized TSRs: 20.000%: $819,405 There can be no assurance as to the amount of any NPM Adjustment or the corresponding reduction in TSRs payable to the Settling States. Mr. Haddon indicated the information on this page explains the potential impact of a NPM Adjustment. 8:20:35 AM Page 15 Preliminary Financing Results · Scenarios 1 and 3 of the following page assume a full refunding of State's Series 2000 and Series 2001 Tobacco Settlement Asset-Backed Bonds, respectively o Scenario 1 allows State to achieve $114.5 million in upfront new money net proceeds o Scenario 3 allows State to achieve $106.5 million in upfront new money net proceeds · Scenarios 2 and 4 assume the Series 2000 and 2001 Bonds remain outstanding. The Series 2006 Bonds are structured on a subordinate basis to the Series 2000 and 2001 Bonds, respectively. In the respective scenarios, no revenues will be available for debt service on the Series 2006 Bonds until the currently outstanding bonds are fully repaid o Scenario 2 allows State to achieve $90 million in upfront net proceeds o Scenario 4 allows State to achieve $87.8 million in upfront net proceeds · Though the bonds in each scenario have a stated maturity of 2060, with their turbo amortization structure they are projected to be fully repaid by 2041 in Scenarios 1 an d3, and 2040 in Scenarios 2 and 4 o Shortening the final planned amortization date of the refunding scenarios to that of the Series 2000 and 2001 Bonds (2015) allows the State to achieve approximately $20 million from a refunding of the Series 2000 Bonds, and approximately $12 million from a refunding of the Series 2001 Bonds Mr. Haddon noted this explains the opportunities for the State to generate additional revenue in 2006. 8:20:53 AM Page 16 Preliminary Financing Results State of Alaska Tobacco Settlement Asset-Backed Bonds, Series 2006, Scenario Summary as of 4/10/2006 [Spreadsheet listing Delivery Date and % of TSRs Pledged; then calculating Initial Par, less (OID)/Premium, equaling Gross Proceeds; less COI and Underwriter's Discount, Debt Service Reserve, Capitalized Interest, Escrow Cost net of Debt Service Fund, and Operating Expenses, plus Release from Series 2000 and 2001 SDR, totaling Net Proceeds to the State; Final Maturity and Final Planned Amortization dates are listed, as well as Cost of Capital and Yield on Final Maturity percentages for Scenario 1: New Money and Refunding of Series 2000 Bonds; Scenario 2: New Money Only: CABs Subordinate to Series 2000; Scenario 3: New Money and Refunding of Series 2001 Bonds; and Scenario 4: New Money Only: CABs Subordinate to Series 2001.] Mr. Haddon outlined the four scenarios. The first would generate the most money possible, over $14 million. Scenario 3 employs the same structure. 8:22:04 AM Mr. Haddon clarified he considered Scenarios 1 and 3 to involve restructuring rather than refunding, because the bonds would not be refunded "purely for economical savings" but would instead extend debt. Mr. Haddon hypothesized leaving the Series 2000 and 2001 bonds outstanding and "only try to wrap new money around" those bonds, saying the new bonds must be "subordinate" to the existing bonds. A zero coupon structure would be required because no revenues would be received until the payment of the Series 2000 and 2001 bonds were fully paid off. No interest payments would be made during that period. Mr. Haddon stated that if a zero coupon structure were used, the State could generate $90 million subordinate to the Series 2000 bonds, and $87 million subordinate to the Series 2001 bonds, to total approximately $180 million. These would be "leveraged out to the maximum amount" the bonds could be sold in the marketplace. 8:23:39 AM Senator Bunde asked the earnings of the Series 2000 bonds without the "wrapping of new money". 8:24:16 AM Mr. Haddon replied that the State has already issued the bonds and received payment so the State would generate no additional funds. The projected payoff of those bonds is 2015. 8:24:38 AM Senator Bunde surmised the proposal is to refinance these bonds. He asked if the same bonds could be sold twice. 8:24:50 AM Mr. Haddon clarified that a new set of bonds would be issued with a portion of the proceeds deposited into an escrow account to service the debt of the Series 2000 bonds. Technically, the first bonds would no longer have claim to the TSRs and the TSR funds would then be "freed up" and available for debt service on the new bonds. Mr. Haddon pointed out the spreadsheet details that the Escrow Cost net of Debt Service Fund would be deducted from the gross proceeds. 8:26:12 AM Senator Bunde commented that each time citigroup becomes involved in the sale or refinance of these bonds, the State incurs a cost. He therefore questioned how the State would generate additional income from the scenarios posed. 8:26:41 AM Mr. Haddon responded that rates are lower, and the time is opportune to participate in the marketplace. The State would generate $114 million net of all fees on the refunding of Series 2000 bonds. This is a market opportunity and is not required. Currently, the State would resume retention of TSR funds when the current bonds mature. 8:27:38 AM Co-Chair Green understood the current timing is optimal due to activity in the market. 8:27:48 AM Mr. Haddon affirmed. He informed that this market has volatility, evidenced in 2004 when the market "shut down". The market is "open now". He could not guarantee whether the market would close again in the future, whether significant litigation would be decided against the tobacco industry or against the Settling States of the MSA. The State "did the right thing" in selling off the TSR risk in 2000 and 2001. If the State were to decide to repeat the action, this would be an ideal time. 8:28:44 AM Senator Bunde estimated the cost of undertaking the action posed in Scenarios 1 or 3 would be approximately $100,000,000. He based this on the Gross Proceeds amount of almost $212 million, less the multiple deductions, totaling approximately $114.5 million Net Proceeds to the State. 8:29:08 AM Mr. Haddon clarified that $90 million of the Gross Proceeds must be provided as escrow for the original bond issuances. A debt service reserve must also be provided. These are not costs to the State, but rather necessary to refund the 2000 and 2001 Series bonds. Mr. Rattigan pointed out that once the Series 2000 and 2001 bonds were refunded, the TSR would no longer need to be dedicated to their repayment and would be "freed" to pay the debt service on the new bonds. 8:29:57 AM Mr. Haddon when refund 00 bonds, not longer using tobacco revenues. 8:30:12 AM Senator Bunde asked the cost to the State of Scenario 1. 8:30:24 AM Mr. Haddon listed transactions costs of approximately $2 million [actual amount shown on spreadsheet is $2,800,831]. 8:30:56 AM Senator Hoffman understood the Series 2000 bonds are currently scheduled to be paid off in 2015 and if no changes were made, the State would have the ability to appropriate the TSR funds after that date. 8:31:13 AM Mr. Haddon responded that 2015 is a target date but is not certain. The target date would be achieved if tobacco revenues "come in" as projected. At the full amortization of the Series 2000 bonds, the 40 percent of TSR pledged to the repayment of those bonds would revert to the State. 8:31:38 AM Senator Hoffman asked the amount anticipated annually and the total amount over time. 8:32:04 AM Mr. Haddon indicated he would calculate the amounts. He noted the State would resume retention of the TSR funds. 8:32:24 AM Senator Hoffman ascertained the issue as deciding whether the State needs revenues from the TSR immediately with no further TSR revenues until 2060; or to receive no revenue until 2015, but resume collection of TSR at that time. The question is whether receipt of $114 million this year would be more advantageous. 8:33:03 AM Mr. Haddon affirmed Senator Hoffman's assessment. Mr. Haddon informed that bonds secured with TSRs have an expected payment date and a stated payment date. The Series 2000 bonds are targeted to pay off in 2015 with a stated maturity of 2031. The proposed bonds of Scenario 1 have stated payment date of 2060 and an expected payment date of 2041. He would therefore compare the 2015 payoff date of the Series 2000 bonds with the proposed expected payoff date of 2041 of Scenario 1 bonds. He agreed that the refunding of the original bonds and issuance of new bonds would extend the debt a number of years. Mr. Haddon explained that by issuing new bonds, the State would receive a present value payment of future TSRs. If no changes were made and the original bonds paid out in 2015, the State would begin collecting revenue from the TSR although not in a "lump sum". If the Series 2000 bonds do no pay out in 2015, the State would not receive TSR revenue until the bonds were fully paid. Mr. Haddon identified the policy question as whether to receive the funding "up front" based on projections that could be sold in the current marketplace; or to accept annual payments in the amount based on annual consumption once the original bonds are repaid. That amount could be significantly lower than current projections. 8:34:59 AM Senator Hoffman countered that the amount could also be considerably higher. 8:35:01 AM Mr. Haddon agreed this was possible. If so and new bonds were issued, those bonds would be paid off sooner. 8:35:23 AM Senator Stedman commented to the question of whether the State should capitalize on the TSR at a time of surplus, or wait until oil prices are down and revenue is needed. A proposal that is "attractive today" could also be worth consideration several years in the future. This, plus how the revenues would be expended, are the policy discussions. 8:36:30 AM Senator Bunde identified a third topic for policy discussion as the worth of the "price of doing business". The State would "give up a lot" by having use of the revenues immediately rather than allowing the settlement to "play out". 8:37:00 AM Co-Chair Green asked the benefits of refunding and reissuing stocks at this time, and the benefits of making no changes. 8:37:08 AM Mr. Haddon gave the favorable market as the reason for undertaking this now. Interest rates are relatively low compared to previous years and the market is "willing to accept" these bonds, meaning the bonds would be saleable. In 2004, the market was not favorable and similar bonds could not be sold. The question is whether the market would be favorable in the future for later bond issuances. Tobacco settlement-secured bonds represent a small portion of the bond market. Mr. Haddon continued that the State could make no changes at this time if officials predicted that tobacco consumption would continue at the current level, the funds were not needed at this time, and receipt of future annual payments in unknown amounts was deemed acceptable. 8:39:05 AM Senator Hoffman asked the amount the Series 2000 and 2001 bonds were sold. 8:39:16 AM Mr. Haddon replied that he would provide this information, surmising the amount of the proposed sales would not be substantially different. Current rates are less than one percent or 100 basis points lower than they had been at the time of the original offerings. Refunding the existing bonds would not result in a significant savings. Therefore, he considered the proposals to be more of a restructuring. 8:40:25 AM Senator Hoffman calculated that the State would generate $114 million on the Series 2000 bonds by extending the potential earnings from 2015 to 2060. 8:40:48 AM Mr. Haddon affirmed; clarifying the target payoff date of the Scenario 1 bonds is 2041. 8:41:02 AM Senator Hoffman asked if the returns would not be a result of previous interest rates of 8.5 percent compared to the current rate of 5.5 percent as reflected on the graph on Page 5. 8:41:13 AM Mr. Haddon noted the Series 2000 bonds were not sold at a rate of 8.5 percent. The graph instead demonstrated the rates in which the secondary bond market, i.e. tobacco settlement-secured bonds, has traded over time. Mr. Haddon stated that if the maturity of the Series 2000 bonds was held at the 2015 target date and new bonds were sold "doing a straight refunding", the State would net $20 million after escrow costs to restore the original bonds were paid. This amount is significantly less than the amount projected for Scenario 1 and demonstrates that approximately $80 million of the $114 million would be generated as a result of extending the debt. Mr. Haddon qualified that if the situation involved general obligation bonds rather than TSR secured bonds, and the State could save $20 million, or ten-percent, through a refunding process, the State would likely undertake the process. Receiving an upfront payment of debt service cost of ten percent is "above the normal threshold that states look to do refundings for." 8:43:14 AM Mr. Rattigan addressed refunding versus "new money". "Freeing up" the tobacco revenues currently dedicated to the Series 2000 and 2001 bonds would allow for issuance of bonds that would be "more desirable by the market." These are current interest bonds that "pay regular interest" and "come at a much lower interest rate" than the zero coupon bond structure that would be required if the refunding was not done. Mr. Rattigan suggested that if a "new money target project list of a certain dollar amount" was agreed upon, the refunding of the existing bonds could allow for the issuance of new bonds at a lower interest rate. Significantly less zero coupon bonds, which are more expensive and generate lower proceeds, would be necessary. AT EASE 8:44:14 AM / 8:44:33 AM Senator Hoffman understood that $20 million would be derived from the release of the Series 2000 and 2001 bonds if the State restructured the bonds. 8:45:00 AM Mr. Haddon corrected that the State would receive $20 million under a straight refunding scenario with a targeted maturity of 2015. The existing bonds have an $11 million debt service reserve account and the new bond scenario would require a $14 million debt service reserve. The $3 million difference would be utilized to pay off the bonds at their maturity. 8:45:42 AM Mr. Rattigan noted that the handout referenced for this presentation does not include a straight refunding scenario. This presentation is based on the assumption that the State would intend to generate more than $20 million. 8:46:24 AM Senator Stedman referenced conversations about the benefits of shifting risks given the uncertainty of future TSR payments and the potential that tobacco manufacturing corporations could dissolve. He requested financial information on these corporations, including international activities, Standard and Poor ratings and the bond and stock ratings of other firms, to help determine possible insolvency. 8:47:37 AM Mr. Haddon replied that rating agencies carry ratings on all the major tobacco companies. However, those companies do not comprise the full component of the TSR. Small tobacco manufacturers also contribute. Philip Morris, Inc. represents approximately 50 percent of the marketplace and has been awarded a weak BBB rating by Standard and Poor. Mr. Haddon also pointed out that the payments per the Master Settlement Agreement are based on domestically shipped cigarettes and do not involve the international markets. In evaluating the security of Philip Morris, only the domestic subsidiary of the company could be considered. RJR, Inc., formally Reynolds Tobacco, is rated below investment grade by the major rating services. The third largest tobacco company, Loews, is a larger conglomerate involving more than tobacco manufacturing. It is therefore difficult to isolate the rating of just its tobacco operations. Mr. Haddon stated that the highest rating TSR secured bonds could receive is BBB. By considering the solvency of all participating manufacturers, the rating agencies consider the revenue stream for these bonds slightly stronger than the individual companies. 8:49:52 AM Senator Stedman surmised that the market place already factors the current financial scenario of the settlement agreements. Therefore, an imminent demise of the corporations would be reflected in current ratings. 8:50:24 AM Page 18 Tobacco Securitization Credit Risks [Flow Chart showing the interrelationship between Tobacco Securitization Credit and Non-Participating Manufacturer (NPM) Adjustment Risk; Decreased Market Share of Participating Manufacturers; Litigation Against Participating Manufacturers; Legal Risks to Master Settlement Agreement; Bankruptcy of Participating Manufacturers; and Uncertainty of Future Consumption.] Mr. Haddon directed attention to this page to demonstrate the risks. 8:51:00 AM Page 24 Market Share of PMs and NPMs [Spreadsheet listing Historical Market Shares as follows: OPMs 1998 - 96.5% 1999 - 92.3% 2000 - 91.4% 2001 - 89.4% 2002 - 86.1% 2003 - 84.5% 2004 - 83.75% SPMs 1998 - 3% 1999 - 3.9% 2000 - 5.2% 2001 - 6.2% 2002 - 7.2% 2003 - 7.4% 2004 - 7.5% NPMs 1998 - 0.5% 1999 - 3.7% 2000 - 3.5% 2001 - 4.4% 2002 - 6.7% 2003 - 8.2% 2004 - 8.75% Source: "Opinion And Order Partially Denying Preliminary Injunction" in 02 Civ. 2939 (AKH), September 14, 2004, Alvin K. Hellerstein, U.S. District Judge, United States District Court for the Southern District of New York.] · NPMs pay into an escrow and do not contribute to the payments flowing to Settling States · Increasing NPM market share means less money flowing to Settling States Mr. Haddon stated this page demonstrates how market shares have changed with an increasing market share going to the nonparticipating manufacturers. An increase in NPM decreases the amount of revenue generated from the MSA because NPM do not make payments into the MSA. This is a risk of holding the TSR. 8:51:40 AM Mr. Haddon returned to the flow chart on Page 18 to speak to the significant litigation against tobacco manufactures. Individual suits are filed, with occasional large judgments made against the manufacturers. Class action suits have also resulted in large judgments against the industry. Such continued losses could result in financial duress to manufacturers. Mr. Haddon furthered that the Master Settlement Agreement itself is being challenged on "two major fronts." Small manufactures are challenging the MSA arguing it is an anti-trust agreement resulting in restraint of trade. If one of these challenges prevailed, the MSA could be "disrupted" and the requirement that the PMs make payments could be "decoupled". Mr. Haddon explained the other challenge is "consumption risk going forward." 8:53:22 AM Senator Stedman remarked that these bonds are not insured against default for the purchaser. The purchaser would have at least as much information about the MSA as the State does. Therefore, he surmised the purchaser would adjust the purchase price to reflect the perceived risk levels. 8:53:57 AM Mr. Haddon affirmed, replying this is the reason the interest rates are higher yielding than general obligation bonds. There is no insurance on tobacco bonds and the purchaser requires higher payment for assuming the risk. 8:54:20 AM Mr. Rattigan added that volatility of the secondary market trading is not only interest rate movement, but also includes "tobacco event occurrence" that caused the risk to be perceived as higher. The market evaluates events that could affect the securitization stream and adjusts accordingly either in the secondary market or in the primary market, which issued no tobacco securitization bonds in 2004 because the risk was deemed too high to be compensated by higher interest rates. 8:55:05 AM Senator Stedman understood that the higher the risk level, the larger the discount the State must concede to attract purchasers. The larger discount would result in less income to the State in the future. He concluded, "It's not a zero sum gain." 8:55:45 AM Mr. Haddon agreed. 8:55:50 AM Mr. Haddon referenced the line graph on Page 5 to point out that the variance between the "general municipal market" and the secondary tobacco securitization market is currently minimal, indicating the market is favorable for selling new TSR bonds. The interest rate is determinative of the discount paid "to present value these payment streams". The higher the interest rate, the bigger the discount factor, but would impact the amount of revenue received "up front" for the State. Mr. Haddon characterized this as a situation in which the State could make no changes and receive the TSR funds once the existing bonds have matured in an amount higher or lower than current payments. The State could instead, refinance the bonds and receive the funds immediately. Mr. Haddon concluded that if new bonds were sold and the State received the revenue "up front" and if the long-term TSR revenues were lower than projected, the State would have "got a good deal". If the TSR revenues were higher than projected, the bonds would be paid off sooner and the State would resume collecting the revenues earlier, albeit later than the repayment date of the existing bonds. 8:58:16 AM Mr. Rattigan commented that in securitizing the TSRs and receiving money up front, the bondholder is assuming the risk. 8:59:49 AM Senator Olson asked the impact on the State's bond rating in the event of a "catastrophic event" involving the MSA. 9:00:05 AM Mr. Rattigan replied that such an event should have not affect on Alaska's credit ratings. Bond raters recognize the TSR bonds are no reflection of the State's solvency. 9:00:33 AM Senator Olson asked what actions other states were taking in this regard. 9:00:44 AM Mr. Haddon referred back to Page 4 and the US map listing the completed and pending tobacco securitizations of all states and some counties and cities. Other states are considering restructuring existing bonds and issuing new bonds. 9:01:52 AM Mr. Rattigan noted that approximately three-quarters of the "deals" done in 2005 and 2006 have been refundings of earlier offerings. 9:02:40 AM Mr. Haddon asserted that the market is favorable for such activities. Alaska would not be required to do refunding of its existing bond offerings. New bonds could be sold, although this would require additional legal restructuring. These are policy issues the legislature must decide to determine the length of extension. Mr. Haddon stated he would provide additional information to address questions raised during this presentation. 9:03:30 AM Senator Dyson asked the amount that citigroup would earn if the State undertook the refinancing of existing bonds and issuance of new bonds. He also asked the net return that the holders of the existing bonds would realize. 9:04:12 AM Mr. Haddon responded that if the Series 2000 bonds were restructured, the bondholders would receive payment from the escrow account. The "security character" of those bonds would be changed, as the TSR revenues would no longer be the guarantee. These bonds would have higher value. Mr. Haddon continued that the bondholders would have the option to redeploy "that money" into the new bonds. As an underwriter, citigroup would attempt to have the Series 2000 bondholders to purchase the new bonds at a higher interest rate. However, the bondholders would not be required to do so. 9:05:38 AM Senator Dyson again asked the rates and the net return the bondholders would receive. 9:05:53 AM Mr. Haddon stated that citigroup could sell new bonds at lower rates, with the bondholders obtaining bonds with a lower yield. The escrow guarantee on the existing bonds would provide incentive to purchase the new bonds. 9:06:35 AM Mr. Rattigan furthered that the holder of Series 2000 bonds, if purchased at the initial offering would receive a return rate of approximately six percent. If the initial bonds were sold at present in the current market, a higher gain of "a few percentage points" would be realized based on the value of the bonds at the time of sale. The bondholders would not be required to sell the bonds. Mr. Rattigan continued that the return on the new bonds would not be set until they were sold and would be determined by the market. The new bonds would likely have a lower rate of return than the existing bonds. A regular market exists for tobacco bonds, those issued by all participating states and local governments. The return on the original Alaska bonds that had been traded would be dictated by the market rate at the time they were traded. 9:08:47 AM Senator Dyson expressed that the witnesses did not answer any of his questions. He again asked how much the company would earn from these transactions. 9:09:06 AM Mr. Haddon told of an underwriting discount, spread, or fee paid on tobacco bonds. The underwriting fee on bonds sold for $216 million would be approximately $1.2 million. If citigroup were the lead underwriter, it would expect to receive fifty percent of the fee, or $600,000. 9:09:49 AM Senator Dyson reposed his second question asking the amount the bondholders could potentially realize if the State were to refund existing bonds and issue new bonds. He asked if the amount would be $5 million, $10 million or another amount. 9:10:14 AM Mr. Haddon responded that the value of the bonds is determined by interest rates. The value of the Series 2000 bonds at the time of initial purchase was low because the interest rates were high. As interest rates decreased, the value of the bonds increased. The increased value of the bonds would only be realized if the bonds were sold when the interest rates were lower. Mr. Haddon continued that Series 2000 bonds would actually trade at an amount higher than 100 cents on the dollar if the State restructured because the original bonds would have a higher security. However, the bonds would generate a lower interest rate and those bondholders could chose to redeploy their investment into the new bonds, which would pay a higher interest rate. 9:12:16 AM Senator Stedman stated that the $2.8 million "COI and Underwriter's Discount" deduction from "Gross Proceeds" in Scenario 1 shown on Page 16 is "the cost of doing the deal". He asked how the amount designated for the escrow account is determined, and whether the amount is an estimate or a firm figure. 9:13:22 AM Mr. Haddon answered that the escrow amount is not an estimate. It is calculated, for Scenario 1, from the debt service owed on the Series 2000 bond deal for the "call date". The call date is the date when the bonds could be retired. The escrow account is established to make the interest payments to the call date and provide principle to retire the bonds. The original terms of the Series 2000 bonds provided that the bonds could be "called in" on "certain terms" and therefore the call date would be defined by those requirements as well as the debt service requirements on those bonds. An independent accountant does this calculation to ensure accuracy. This is a legal requirement and the amount must be calculated to the "penny". 9:14:34 AM Senator Stedman asked if no reinvestment risk would be incurred. 9:14:42 AM Mr. Rattigan responded that no reinvestment risk would exist for the escrow, due to the requirement that the account have sufficient funds. Tobacco securitization contains many "nuance and complications". The escrow and refunding components are no different than any refundings the State has done in the past. He gave airport bonds as an example in which older bonds were refunded to achieve a savings. Those older airport bonds are now guaranteed by an escrow account and no longer have any claim to airport revenues. At the time of pricing, a deposit is required in an amount verified by an independent accounting firm to be sufficient. 9:15:46 AM Senator Stedman asked if escrow funds would be set aside and would collect interest. Mr. Haddon affirmed. Senator Stedman asked how all interest rate exposure would be removed. The escrow account would be held for years if not decades. 9:16:17 AM Mr. Haddon replied that the escrow funds would be utilized to purchase federal government securities guaranteed by the U.S. Treasury Department or other federal agencies. The interest rate of those securities would be fixed and the income generated would be calculated to determine the amount of securities necessary to pay the principle and interest payments on the original bonds. The escrow account is required before the TSRs could be pledged for new bonds. 9:17:33 AM Senator Stedman understood the issue of buying zero coupons or government backed bonds. He asked about the imbedded costs of establishing and administering the escrow account. 9:18:05 AM Mr. Haddon answered that the escrow account would have no embedded cost. The securities "will cost what they cost based on the current market". The $88 million cited for Scenario 1 could change with interest rates over next couple weeks. This is the risk of delaying the transaction. 9:18:39 AM Mr. Rattigan told of the requirement that the securities purchased to fund the escrow "are bid out to the market" to ensure that the State has achieved the "best possible price." Bond council would also provide a "defeasance opinion" avowing that the Series 2000 bonds were officially defeased and no longer have the right to receive TSR payments they were originally secured by. 9:19:23 AM Co-Chair Green suggested the witnesses meet with interested Committee members individually to address concerns and respond to questions. 9:19:39 AM The bill was HELD in Committee.
| Document Name | Date/Time | Subjects |
|---|