California sets $1.7 billion tobacco bond sale

NEW YORK, June 15 (Reuters) - California will sell $1.7 billion of tobacco bonds on Wednesday, providing the supply-hungry municipal debt market with one of its high-yield staples and topping next week's roster of deals.

The Golden State Tobacco Securitization Corporation, a special-purpose trust established to securitize proceeds from California's share of a nationwide settlement with U.S. tobacco companies, will issue the debt in a three-part series.

The negotiated deal pricing through Citigroup Global Markets will include nearly $500 million of Series 2018A-1 serial bonds, maturing from 2030 to 2035; $250 million of turbo term bonds, maturing in 2036; and $1 billion of turbo term bonds due in 2047.

S&P Global Ratings gave the serial bonds and the 2036 bonds preliminary ratings of BBB and BBB-minus, respectively. The additional $1 billion of debt is unrated.

California was among many states to reach a 1998 settlement with major tobacco companies, which agreed to make annual payments to help states recoup medical costs stemming from smoking-related illnesses.

Tobacco securitization bonds are backed by future payments received from the agreement. Those payments are contingent, in large part, on cigarette consumption, which is expected to continue its fall for decades to come. That drop means less money to back the bonds.

By 2047, cigarette use in the United States is expected to decline more than 61 percent, according to an IHS Global Insight study included in a presentation on the deal to potential investors. Nearly $7 billion of bonds and $1.2 billion of notes are scheduled to hit the market next week. Triple-A-rated Georgia will offer a four-part $1.2 billion taxable and tax-exempt general obligation bond sale in competitive bidding on Tuesday.

Some 35 percent of the bond proceeds will go toward higher-education capital projects and 30 percent will be used for elementary and secondary schools, according to a presentation on the Georgia deal to possible investors. Bridges, transit, water and sewer systems will also receive some of the proceeds.

U.S. municipal bond funds reported $449.6 million of net inflows in the week ended June 13, compared with $189.5 million in inflows in the previous week, according to data released by Lipper on Thursday.

The four-week moving average remained positive at $237.3 million, said Lipper, a unit of Thomson Reuters. High-yield muni bond funds reported inflows of $322.4 million, up from $147.2 million in the previous week.

(Reporting by Laila Kearney in New York Editing by Karen Pierog in Chicago and Matthew Lewis)