State picks firm to oversee tobacco bonds

JEFFERSON CITY, Mo. -- Missouri has selected a New York firm to coordinate the sale of up to $600 million in tobacco settlement bonds that could supply cash for future state spending.

The state Tobacco Settlement Financing Authority cited the experience of Bear Stearns in selecting it Monday over eight other firms. The bonds could be offered for sale as early as November.

Bear Stearns has issued tobacco bonds in states such as Louisiana and South Dakota and has deals pending in California and Washington.

It is possible that Bear Stearns may purchase some of Missouri's bonds itself, said Philip Rooney, managing director for the firm's Chicago office.

The Missouri Legislature has authorized bond sales of up to 30 percent of the $4.5 billion the state expects to receive over 25 years from a national settlement with big tobacco companies over the costs of treating tobacco-related illnesses.

By receiving the upfront payment from bonds, the state would forgo about $1.3 billion in expected settlement payments in future years. In exchange, it would receive quick cash to shore up a shaky state budget in the short term.

No more than $175 million of net bond proceeds may be used in any one state fiscal year, according to state law.

Fees for Bear Stearns will be based on a percentage of the bond sales to be determined by the state in the next few weeks, state officials said.

According to the company's proposal, it has already issued more than $5 billion in tobacco bonds as the senior manager in other tobacco deals.

Bear Stearns, along with AG Edwards and Jackson Securities, will oversee the bond issue using two different structures. One would result in earlier repayments of bonds while the second would allow the bond issuer to receive a portion of the bond revenues that are above the cost of debt.

Bear Stearns' proposal allows the company to offer the bonds to retail buyers who generally purchase smaller amounts and to institutional buyers who generally purchase larger amounts.

Institutional investors typically demand higher returns than individual investors, which increases the cost of debt for the issuer. Retail bonds are more expensive to sell.

Essentially, once a tobacco bond is sold the money goes to the state of Missouri. Investors hope that the bonds increase in value over time. Sometimes, the value of the bonds decrease.

"There's some risk involved there," said James Carder, director of the division of accounting in the Office of Administration, which has been overseeing the bond process.