Rhode Island plans to sell tobacco-backed bonds within six weeks

PROVIDENCE – Rhode Island plans to put its tobacco-backed bond deal back on the calendar within six weeks after a lawsuit delayed it for five months, according to Citigroup Inc., the lead manager on the sale.

A legal challenge from OppenheimerFunds Inc. had delayed the deal, originally planned for $594 million, since August. A state court judge ruled last week that the Tobacco Settlement Financing Corp., which receives payments from a settlement agreement with cigarette producers, was within its rights to adjust the payments because it solicited the necessary bondholder approval before the bond sale.

OppenheimerFunds, a New York-based asset manager that owns tobacco debt the state sold in 2002 and 2007, questioned the deal structure. The new securities would refund the 2007 debt. They would also subordinate holders of the 2002 bonds because the state would siphon at least $20 million from proceeds of the new bonds for its general fund, changing the order in which investors are paid.

“The timing of the issuance is still being worked out,” Thomas Mullaney, executive director of the state budget office, said in an e-mail Tuesday. “The Tobacco Settlement Financing Corp. is still looking to undertake this issuance for approximately the same amount” as planned in August.

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Franklin Advisers and Goldman Sachs Asset Management also own the 2002 debt, according to data compiled by Bloomberg. The companies didn’t immediately respond to calls and e-mails seeking comment on the ruling and the structure.

“We disagree with the court’s decision and are reviewing the opinion and weighing all available legal options,” Kaitlyn Downing, a spokeswoman for OppenheimerFunds, said in an e-mail.

In a 1998 accord, tobacco companies agreed to pay 46 states for expenses associated with smoking-related illnesses. Rhode Island created the Tobacco Settlement Financing Corp. to raise money from the deal, selling bonds backed by future settlement revenue in exchange for an upfront payment.

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