Calif. Tobacco Bonds May Require 6% Yield

California’s offering of tobacco bonds this week may require tax-free yields of 6% or more on the 30-year securities to attract enough buyers, even with a backup promise by the state to provide tax money to cover debt payments if necessary, investors said Monday.

A group of investment banks led by Citigroup Inc. was testing the appetite of individual investors Monday by offering a 5.75% yield for their orders on a 30-year tobacco bond as part of the total planned $2.3-billion sale, according to traders.

Bigger investors such as mutual funds and insurance companies will submit bids Wednesday.

The bonds are backed by payments the state will receive from tobacco companies over the next 40 years as part of the 1998 liability settlement between the industry and the states.

But because of investors’ concerns about the tobacco industry’s financial health, California is pledging to back the bonds with tax revenues, if needed.

Nonetheless, bigger investors will push the bonds’ yields higher because of credit-rating downgrades that hit the industry this summer, and because of concerns about California’s own fiscal health, some experts said.

“The market’s going to be looking for quite a bit more” yield than the initial 5.75% offered to small investors, said George Strickland, who helps oversee $2.2 billion in municipal bonds at New Mexico-based Thornburg Investment Management.