assumption: If cigarette sales slipped by more than an average of 2.5 percent a year, the riskiest CABs “may never be repaid,” the offering warned. No rating agency assigned them a grade 2013 an indication of how speculative the debt was.
Despite the risks, Oppenheimer Funds, the New York-based investment manager, scooped up most of the NYCTT V debt. The firm has long been known in the industry for chasing high-yield securities, which can help attract investors looking for better-than-average returns in some of its funds.
The deal closed in November 2005. Counties received their cash, bankers collected $4.2 million in fees, and the clock began ticking on the billions promised to bondholders.
At this year's SALT New York conference, Jean Hynes, the CEO of Wellington Management, took to the stage to discuss the role of active management in today's investment environment. Hynes succeeded Brendan Swords as the CEO of Wellington at the end of June after nearly 30 years at the firm. Wellington is one of the Read More
Crash of the CABs
It didn’t take long for it to become apparent that Niagara’s tobacco corporation was headed for trouble. In 2009, partly because of rising federal and state taxes, cigarette sales slid by 8.3 percent 2013 far more than the 2.5 percent decline that was assumed in the CAB deal.
In 2010, Niagara officials openly mulled the “possible future financial failure” of their tobacco corporation, meeting minutes show. Were it to fail, they feared the debt would fall back on taxpayers, since “Niagara County was the benefactor of the funds,” according to the minutes.
By design, entities like Niagara’s Tobacco Asset Securitization Corporation, or NTASC, are supposed to be independent bodies whose finances are separate from the counties. The idea is to distance taxpayers from any claim to repay the corporation’s tobacco debt, but how that might hold up in court is unclear.
“I think it’s an open question as to what obligations the courts would ultimately find them having here, even though they did not issue the debt,” said David Kidera, head of New York’s Authorities Budget Office, which oversees entities like the NTASC.
Burmaster, the county legislator who serves as the president of the NTASC board, acknowledged that the situation is muddled. “Even though we’re a separate organization here as this NTASC, we’re not being fooled, not trying to fool anybody by saying we don’t have any connection with Niagara,” he said. “We do. We do in fact. That’s why we exist.”
By June 2013, with Niagara’s CABs accumulating more interest and cigarette sales continuing to decline, repaying the debt had become mathematically impossible.
That news was disclosed to counties during a webinar sponsored by NYSAC, in which Flynn 2013 the banker who structured the NYCTT V deal 2013 reported that eight of the participating counties might “never” see their CABs repay.
“Because of the structure of the deal,” Flynn divulged, “we don’t anticipate that the tobacco receipts will be able to be returned.” Two other counties might see CABs repay on a delayed schedule, in 2076 and 2087. That would divert tobacco income to bondholders for decades longer than hoped.
Flynn and his investment banking firm, Jefferies Group, declined to comment.
Acquario, NYSAC’s executive director, said the webinar was held to inform counties about a possible refinancing opportunity for their “senior” tobacco bonds 2013 those first in line for repayment. Thanks to lower interest rates, counties could save money on interest and pocket some savings for taxpayers.
Niagara officials began exploring how to do just that when another little-appreciated aspect of the CABs got in the way.
“Difficulties have arisen with objections being raised by Oppenheimer Funds regarding the refinancing,” legal and financial advisers reported to the Niagara tobacco board at an April meeting.
At issue was a standard protection afforded to owners of subordinate bonds like the counties’ CABs. Even though the CABs had a lower priority on repayment than bonds above them, bondholders had the right to object to any refinancing plan that diverted proceeds away from them and to the county.
By proposing to capture some of refinancing proceeds 2013 instead of letting all the cash cascade downward to the CABs 2013 Niagara would need Oppenheimer’s consent.
At a June meeting at The Shamus, Niagara officials learned how little leverage they had. They could indeed capture some money from the refinancing, but the price would be to bail out some of Oppenheimer’s CABs, according to the minutes of the meeting. They voted 5-1 vote to take the deal.
Final terms emerged in September, with Niagara netting $2 million for county use. The NTASC paid $6.9 million to bail out Oppenheimer’s riskiest CABs 2013 the ones with the lowest chance of repayment.
With interest owed, the CABs had accrued a repayment tab of about $13 million on paper, but Oppenheimer had valued them at $1.8 million on its books. Thus, the bailout helped Oppenheimer limit its losses on a debt so speculative that it might never repay what it promised.
In an interview at The Shamus shortly before the deal closed, Burmaster said he didn’t mind helping Oppenheimer. More important, he said, was to protect the county’s “integrity” with creditors.
“The first and primary reason for all of this is to make sure that we satisfy the obligation,” he said. “I don’t begrudge them making that money, or a little profit on it. Hell, that’s what they’re in business for.”
The sole “no” vote came from Karen Castle, a county employee who is also NTASC’s secretary-treasurer. “We’re making them whole, and it’s to the benefit of Oppenheimer and only Oppenheimer as far as I can see,” she said.
Castle also noted the three other tranches of CABs that remain on the corporation’s books.
“Fifteen years from now,” Castle said, “we’ll be in the same predicament again.”
If you have experience with or information about tobacco bonds in your state or county, email [email protected]
For more coverage, read ProPublica’s previous reporting on How Wall Street Tobacco Deals Left States With Billions in Debt.
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