Scoring the Latest Tobacco Bond Bailout: Investors $10, Taxpayers $1

Chautauqua County, New York helped a bondholder get nearly $6 million for bottom-of-the-barrel debt – the bondholder let the county keep $600,000


In our story last month about a tobacco bond bailout by New York's Niagara County, we noted that another county, Chautauqua, also had a deal in the works involving its distressed bonds.

Now the deal is done, and it seems Chautauqua fared even worse than its nearby upstate neighbor.

Oppenheimer Funds, the New York mutual fund manager, got $5.9 million to cash out of a speculative Chautauqua tobacco bond issue it had recently valued at only about a fourth of that amount. The firm declined to comment on the deal.

County taxpayers got $600,000, or about one-tenth of Oppenheimer's take. Just the fees necessary to get the deal done – $1.2 million paid to lawyers, bankers and others – were more than double Chautauqua's take.

"It is rare to see the issuer getting so little compared to the cost of issuance," said Matt Fabian, managing director at Municipal Market Advisors, a Massachusetts-based research firm.

In Niagara's recent tobacco bond bailout, the county got to keep about $2 million, a little less than a third of Oppenheimer's take of about $6.9 million. As with the Chautauqua deal, that was about four times value Oppenheimer reported on its books, according to mutual fund data provider Morningstar.

What's going on?

As we've reported previously, it all started with a massive legal settlement in 1998 under which big tobacco companies agreed to pay billions of dollars in compensation to states and U.S. territories like Puerto Rico for the health care costs of smoking. New York and California also shared the proceeds with county governments and some cities.

The money is paid out in yearly increments, but to get cash up front, many of these governments turned to Wall Street. They created special tobacco corporations and sold bonds to investors like Oppenheimer, agreeing to repay the debts exclusively with the tobacco income.

Years later, many of those bonds are headed for default. That's in part because less money is coming in under the legal settlement than expected, and also because some of the riskiest bonds – called capital appreciation bonds, or CABs ­– are piling up so much interest that they may never repay. As long as they remain outstanding, tobacco money coming in goes to investors and not the governments.

That was Chautauqua's situation.

The county of 133,000 participated in a 2005 CAB issue alongside 23 other New York counties. These CABs collectively obligated the counties' tobacco corporations to pay back nearly $6.8 billion. The debt was so big that Chautauqua said it might never see its tobacco money flow back to taxpayers.

Had Chautauqua never issued tobacco bonds, the county would have collected about $2.5 million this year from the settlement for its own uses. That might have come in handy now as the county is looking to close a $6 million budget deficit beginning in 2016.

County officials say the $600,000 received from the restructuring deal, which closed Nov. 6, will help fund a new facility for storing and maintaining highway equipment, such as snow plows. The county said it also benefits by avoiding the "likelihood of default."


The CABs the county bought out in the deal would have required a gargantuan $373.5 million payment on June 1, 2060.

The tradeoff is more debt today. The transaction refinances $27.5 million of senior tobacco bonds at a lower interest rate, but it increases the amount borrowed to $34.8 million. Most of the increase in principal went to buy out Oppenheimer, which still holds two additional sets of Chautauqua CABs.

Once Chautauqua's remaining tobacco debts get repaid, it can again start collecting settlement money for taxpayers' benefit.

"Eventually, there will be some residual proceeds from this refinance that will come back to the county," Chautauqua County Executive Vincent Horrigan said in an interview.
"It's quite a ways off," he added.

Under the deal, the remaining CABs would be repaid in 2049.

With dozens of other governments sitting on these distressed tobacco debts, Fabian said he expects more will follow the same path.

"The Wall Street way," he said, "is to keep doing something until it doesn't work anymore."




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Are Indian Car-buyers Second Class?

Indian car-buyers must insist on better cars and more safety


The Japanese have a particularly offensive way in which they dismiss people they consider inferior. This is used to best effect against ‘gaijin’, the pejorative for ‘foreigners’, who do not really know how serious this insult is.

With globalisation, I have seen this all over the non-English speaking world, especially from people of countries considered technologically superior in industries like automobiles or transportation systems. To a large extent, I think, it applies to the way automobiles are sold in India; my experience with the Maruti Ciaz has been along these lines.

The Maruti Swift was one hatchback designed to be a global car, with no compromise on safety and performance in design. Subsequent iterations for the Indian version made the cars slightly ‘different’, but not as much as the other ‘designed for India’ cars which play dangerous games with safety like seats inside the rear hatch, more space by re-designing the sides in such a way that side-impact bars are removed and other deletions.

The Maruti Ciaz lies somewhere in the middle. There is no doubt that the two engines on offer have been tweaked to a point where fuel economy is brilliant, without performance suffering a lot. The space provided for people and baggage is excellent too—though the rear seat height and comfort could certainly have been better for taller and fatter people.

Safety test results, however, are not yet available. That does not sound good. The Ciaz has one variant, the VXi+, which has pretty much everything you need. This was the real deal-breaker for us, and when we went in for a cancellation, we encountered the famous dismissive I have mentioned in the beginning.

“Get your booking amount back if you can” was the attitude initially. A few days on social media took care of that. A chance personal encounter at an airport did the rest and the dismissive wave, once again, showed that unless we, as people, insist on better safety in our cars, buses and bikes, we will only deserve such reactions.

By rights, even the lowest-end variants of cars sold in India need to have at least two airbags and, unless the Indian customer demands this, it is not going to happen. We cancelled our booking of the Maruti Ciaz because only the highest spec variant, the Z option in petrol and diesel, provided this; but we did not want the rest of the stuff that is sold bundled in the Z variant that are just expensive distractions.

We are going to continue getting dismissive waves from people who think we are inferior customers. And, at the same time, if you look at the specs of the more Indian Tata Zest, you see a higher attention to safety for even the lowest variants.


Touch-screens Distract from the Windscreen

Should ‘entertainment’ and ‘infotainment’ consoles be sold as part of the front dashboard standard equipment list in cars? The argument is probably going to be decided against these distractions in the new legislation on road safety; so, if you own or are planning to buy a new car which has all sorts of fancy video equipment facing the front seat, please think again. You may have to remove them.

My own experience has been proved time and again that round dials with tactile habit-forming actions work best and make for the least distractions when driving. Push buttons are the worst, regardless of how well you think you know standard keyboards or numerical pads. Push-pull buttons for on/off functions work very well too.


And rotary dials are any day better than digital read-outs. I insist on the presence of a rotary analogue-type simple fuel gauge, engine temperature and speedometer/tachometer combo which my eyes can read and my brain can digest without distraction. Yellow and red lights, as well as audio alarms for danger warnings, catch the eyes and ears and transmit without problems to the brain.


(Veeresh Malik started and sold a couple of companies, is now back to his first love—writing. He is also involved in helping small and midsize family-run businesses re-invent themselves.)




3 years ago

The Mercedes Benz and BMW sold in Japan are the best quality in the World. Followed by Europe. Those made and sold in South Africa are distinctly superior to the ones sold in India.


3 years ago

Indian buyers are second class. They pay more for less of everything. A standard established by a corrupt and unaccountable Government which enforces cutting corners and higher prices by excising several pounds of flesh at every stage whether import, materials procurement, manufacturing, employment, transport, cross border movement or sale on every factor of production whether money, materials, land or men.In such a controlled and mulcted "market", where the "Consumer Courts" are drowning like the other courts and only great wealth or influence can purchase a verdict, standards, per-se, are like an Indian Ph.D conferred on a politician by an Indian University that employs the politician's crony as a Vice Chancellor! Welcome to India.


3 years ago

Can you please suggest safer cars in sub Rs 8 lac category?

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