Alabama Leads the Way in Bond Issue, Wall St. Journal Takes Notice

Alabama’s finance department just closed its seventh debt deal of the last 12 months with total savings just under $100 million and it’s time that they get a some recognition for the job they’re doing during these dire economic times.

Over the weekend, The Wall Street Journal published an article praising Alabama’s handling of Tobacco Settlement Revenue Bonds. WSJ’s online pay wall makes it impossible to link to the full article be this excerpt will give you an idea of the back-story:

“Alabama last week sold $93 million of tobacco bonds, maturing from one to nine years, in a deal that illustrates a shift to a model that some investors say is more palatable.

“Like the tobacco bonds sold by other states, the Alabama bonds are backed by payments from tobacco companies under the 1998 settlement, at the time valued at more than $200 billion, that compensated states for the costs of treating smoking-related illnesses. But Alabama sought to overcome a problem facing the tobacco-bond market: The revenue stream that underpins the bonds has fallen way short of forecasts, raising worries that some states could miss interest payments and that investors wouldn’t get their money back.”

The Journal went on to point out that as a result of the Alabama Finance Department’s savvy handling of their bond revenue projections, investors have flocked to the bonds:

“Jim Dugan, co-chief investment officer of fixed income at Brown Advisory, which manages $1.9 billion in municipal bonds, said Alabama’s conservative assumptions on how much tobacco money it would get, combined with an attractive interest rate compared with other bond sales at the time, drew him to the offering.

“We didn’t get as many as we wanted,” Mr. Dugan said.”

The tobacco bond refinancing alone is expected to result in savings of over $17.9 million over the remaining 10-year life of the bonds.

The picture below from The Wall Street Journal illustrates the problem with tobacco bonds and how Alabama has acted in contrast to other states. A finance department press release follows the picture.

[Note: Finance Director Marquita Davis was #38 on this year’s Yellowhammer Power & Influence 40 and Deputy Finance Director Clinton Carter made our list of “Power & Influence Up-and-Comers“]

March 19, 2012 — The Alabama 21st Century Authority (21st Century) successfully completed the refinancing of $102.0 million of outstanding Tobacco Settlement Revenue Bonds (Tobacco Bonds), issued in 2000 and 2001. The bond refinancing is expected to result in savings of over $17.9 million over the remaining 10-year life of the bonds.

Due to a very favorable interest rate environment, exceptionally low overall leverage and an A/Stable credit rating, the bonds sold well inside initial expectations. The original bond’s interest rate of 4.82% will be replaced with an average true interest cost of 2.47% for the new issuance. Citigroup, Sterne, Agee & Leach, Frazer Lanier Company and Kipling Jones & Co. were the syndicate of investment banks which underwrote the bonds. As a result of the transaction, Standard & Poor’s upgraded the Authority’s debt to an “A” rating, the highest rating of any tobacco settlement bond in the country.

State Revenue Commissioner, Julie Magee, praised the sale, saying, “Today’s refinancing will greatly benefit the people of Alabama and each of the agencies receiving funding through the 21st Century Authority. Given the dire economic climate that we’re currently enduring, the timing of the savings could not be more opportune.”

The Tobacco Bonds were issued in 2000 and 2001 for economic development and industrial recruitment as well as for the benefit of the Children’s First Trust Fund, Senior Services, Medicaid, and the State General Fund.

The refinancing will result in present value interest rate savings totaling $16.4 million, or approximately 16.1% of the outstanding balance of the bonds. All of the savings will be passed along to the 21st Century Authority through lower annual debt service. The cash flow savings will be $9.65 million during 2012 and $8.21 million in 2013.

State Finance Director, Marquita Davis, said, “Today’s sale results are unprecedented, with some of the lowest interest rates in the history of the State of Alabama, a testament to the financial strength and conservative balance sheet of our great State. The structure of this sale was very unique in that we chose not to maximize potential leverage, but rather to refinance for savings and to hold maturity dates constant.”