State offers $4.46 billion in tobacco securities

California on Monday launched an offering of $4.46 billion of bonds backed by settlement payments from cigarette makers, in the biggest municipal bond offering since 2004.

Underwriters led by Bear Stearns Cos. offered yields as high as 5.25% on the portion of the securities maturing in 2047, according to a source familiar with the deal.

Because the interest is exempt from U.S. and state income tax, the returns to investors can be comparable to much higher pretax yields on taxable bonds.

The tobacco bonds were offered Monday to individual investors. Institutional buyers are expected to bid Wednesday.

California will use some of the proceeds to refinance tobacco debt it sold in 2003, of which $2.865 billion is outstanding. The state also intends to raise at least $900 million from the offering for public schools and community colleges.

U.S. states in 1999 began borrowing against expected income from a $208-billion master settlement with the cigarette industry, a pact meant to compensate them for treating sick smokers.

Sales of such debt “could ultimately exceed $20 billion in 2007, a record calendar by a wide amount,” Citigroup Inc. municipal strategist George Friedlander wrote in a report last week.