(Bloomberg) -- California, through the Golden State Tobacco Securitization Corporation, is getting ready to sell $1.8 billion of high-grade bonds on Sept. 30 to refinance older debt backed by the landmark tobacco settlement, according to deal documents.

The bonds are federally taxable but exempt from California income taxes. Jefferies and Citigroup act as joint senior managers.

Why It’s Noteworthy

The deal is the largest taxable tobacco deal ever and the largest taxable deal since 2018, according to data compiled by Bloomberg.

The state is pledging to cover debt service if the settlement revenue falls short, which provides more security to investors. Ratings of the new bonds are based off the state’s credit.

California expects that revenue from the settlement, which draws from sales of tobacco, to cover debt service. IHS Global projects that the average cigarette consumption from 2021 through 2046 to decline at an annual rate of about 3.4%, bond documents show.

Credit Ratings

Moody’s Investors Service rates the debt Aa3 with a stable outlook. S&P Global Ratings rates it A+ with a positive outlook. Fitch Ratings rates it AA- with a stable outlook.

Market’s View

Potential buyers would be those who typically invest in California bonds, said Terry Goode,  a senior portfolio manager at Wells Capital Management. Because the debt is backed by state appropriation, “you’re not going to get any additional spread for the tobacco component,” he said.

“We haven’t had a lot of large taxable deals,” Goode said. “People are starved for taxable paper.”

An existing bond enhanced by the state’s backing with a 3.115% coupon that’s due in 2038 traded Wednesday with an average yield of 2.91% or 162 basis points over benchmark Treasuries, data compiled by Bloomberg show. A bond with a 2034 maturity is seen yielding in the area of 150 basis points over benchmark Treasuries, according to a pre-marketing wire viewed by Bloomberg.


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