Tobacco Bond Ratings Lowered

Credit rating companies, and some investors, turned downbeat Monday on the tobacco settlement bonds that California and other states have used to help plug budget gaps.

The shift, triggered by fears over tobacco giant Philip Morris’ finances, may jeopardize California’s plan to sell another $2.3 billion of the settlement bonds in mid-April, some experts said.

Following through on a warning last week, Moody’s Investors Service said it cut the debt grade of Philip Morris parent Altria Group Inc., and also reduced its ratings on $19 billion of tobacco settlement bonds. Moody’s lowered its rating on the $3 billion of tobacco bonds sold by California in January to A3 from A1.

The new Moody’s rating on the California bonds still is an investment-grade rating. But another rating firm, Standard & Poor’s Ratings Service, said Monday that it may lower some tobacco bonds to “junk” status if Philip Morris misses a payment due to states on April 15.

Major cigarette companies agreed in 1998 to pay 46 states more than $200 billion over 25 years to settle health-liability claims. In turn, some states have issued bonds backed by the future payments as a way to advance themselves the money.

But Philip Morris said last week it may not be able to make its next payment to the states, because of an Illinois court order that it put up $12 billion to cover damages in a smoking case.

Investors’ nervousness about the viability of tobacco bonds was evident Monday: Traders said the price of one of the long-term California bonds issued in January fell sharply, pushing the yield to 7.3% -- up from 7% when the state sold the securities.

Few bonds were changing hands. Even so, municipal bond fund manager Steven Permut at American Century funds in Mountain View, Calif., said he doubted California would proceed with plans to sell more bonds this month.

A spokesman for California Treasurer Phil Angelides wasn’t available Monday. As of last week, Angelides’ office still planned to issue new bonds.