California’s Move Rewards Bondholders

Klotz on Bonds

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<h3>James A. Klotz</h3>

James A. Klotz

California is taking a page from New Jersey’s playbook and plans to refinance $3.3 billion of state-backed tobacco bonds (double-barreled), another indication of the increasing strength of tobacco bonds and the improving health of California’s economy.

In addition to California and New Jersey, Louisiana is also reportedly considering taking advantage of current low interest rates to refund outstanding tobacco bonds.

As we mentioned in our article regarding New Jersey’s refinancing plans (“Insight, Patience Pay Off for Tobacco Bond Holders“), tobacco bondholders are being rewarded for the confidence they’ve shown in these issues.

By refinancing the state-backed tobacco bonds, originally issued in 2003, the state will save $525 million, which will be used to close the state’s general fund budget deficit. Taking the form of a “pre-refunding,” the refinancing will result in the 2003 series bonds being escrowed in U.S. Treasury securities. This has already prompted a jump in the price of the bonds. The resulting increase in price gives investors the opportunity to lighten their tobacco holdings at a profit if they so choose.

California’s move comes at a time when its fiscal situation is improving. You may recall that two years ago, the state faced a gubernatorial recall election and a chorus of Cassandras warned of a liquidity crises. Since then, California has made great strides in improving its credit position.

Prudent investors who recognized the state’s underlying strength (see “Related Articles” above, left ) are being rewarded.

James A. Klotz

President

James A. Klotz is the President of FMSbonds, Inc.
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Jul 20, 2005

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