New York City to End Sale of Tobacco Bonds

California will face one fewer potential competitor in the market for municipal bonds backed by the 1998 liability settlement between the tobacco industry and the states.

New York City, the first government to sell bonds backed by its share of the tobacco settlement, on Monday said it did not intend to sell any more such debt and was weighing “restructuring alternatives,” including refunding all outstanding debt.

The city attributed its decision to a June 16 credit downgrade of R.J. Reynolds Holdings Inc. by Moody’s Investors Service. The downgrade triggered a so-called trapping event that protects holders of the New York tobacco bonds by forcing the city to set aside extra cash for them.

That robs the city of a substantial chunk of the payments Reynolds will make over time.

States and cities have sold $19 billion of bonds backed by future tobacco industry payments. New York City has issued $1.3 billion of tobacco bonds and had expected to sell up to $2.8 billion more of the debt.

Next week, California plans to sell $2.3 billion of tobacco bonds maturing in four to 40 years.

The new bonds are expected to be backed by a “credit enhancement” -- a pledge that the state would make up, from its general fund, any shortfall in tobacco industry payments should the companies find themselves in financial trouble and unable to pay.