Rhode Island’s plan to sell $594 million in debt backed by tobacco-company payments was challenged by OppenheimerFunds Inc., which claims the deal violates the rights of current bondholders to continue getting revenue related to a 16-year-old accord over health-care related costs.
In 1998, 46 states agreed to a settlement requiring tobacco product makers to make payments for state expenses over to smoking-related illnesses. Rhode Island created the Tobacco Settlement Financing Corp. to raise money from the deal, exchanging future revenue from the accord for an upfront payment. The state sold bonds to investors including OppenheimerFunds based on a guarantee it would get some of that revenue from the national settlement, according to a copy of the complaint provided by the fund.
This week, the state plans to refund securities backed by funds from the pact, according to bond documents. The state tobacco corporation “now seeks to siphon off those funds from bondholders and give them to the state,” Oppenheimer claimed in the lawsuit, which couldn’t be immediately confirmed in court records.
The current plan to issue more debt would divert at least $20 million from prior bondholders, the firm claimed. OppenheimerFunds seeks a finding that the transaction would violate state law.
“We believe it is our responsibility to stand up for the rights of bondholders and our shareholders when the unlawful acts of issuers or others threaten those rights,” the firm said.
Thomas Mullaney, the state’s budget officer, didn’t respond to a message left at his office in Providence seeking comment. Scott Helfman, a spokesman for New York-based Citigroup Inc., the lead underwriter on the deal, declined to comment.
The lawsuit is Oppenheimer Rochester High Yield Municipal Fund v. Tobacco Settlement Financing Corp.; 14-3857; State of Rhode Island Superior Court.
–With assistance from Elizabeth Campbell in Chicago and Brian Chappatta in New York.