S&P; Cuts Rating on Tobacco Muni Bonds
Standard & Poor’s cut the credit ratings Friday on $18 billion in municipal bonds backed by payments that cigarette makers owe the states, citing weakening industry conditions.
The ratings reductions, which apply to debt maturing after April 15, 2004, come as cigarette makers encounter an “adverse litigation environment and expectations for additional state excise tax increases,” S&P; said.
A report by Altria Group Inc.’s Philip Morris USA that cigarette shipments fell by 16% in the first quarter also contributed to the ratings downgrades.
“The first-quarter volume decline is outside of what was expected,” said Eric Hedman, an S&P; analyst.
Ratings on tobacco-settlement bonds sold by governments including San Diego and Sacramento County, and New York and Rockland counties in New York, were lowered.
S&P; will review all its ratings on bonds backed by $246 billion in settlements that cigarette makers owe the states after being sued in the 1990s over smoking-related illnesses, Hedman said. They may make additional rating cuts, he said.
Most tobacco settlement bonds were rated based on a forecast of a 5% decline in cigarette shipments, S&P; said.
First-quarter shipments for Philip Morris, R.J. Reynolds Tobacco Co., Brown & Williamson Tobacco Corp. and Lorillard Tobacco Co., the four companies in the settlement, fell 12.9% to 88.2 billion cigarettes, according to market research firm Management Science Associates.
S&P; also cited the risk of additional litigation after Philip Morris threatened to default on a $2.6-billion settlement-mandated payment due April 15 after it lost a class-action lawsuit in Madison County, Ill., and was forced to post a $12-billion bond.
The bond was reduced April 14, and the company made its payment as scheduled.
Other pending class-action lawsuits may result in rival companies having to post bonds as well, S&P; said.
Philip Morris, the world’s largest cigarette maker, was accused in the lawsuit of misleading consumers by misrepresenting the safety of “light” cigarettes.
Fitch Ratings said Thursday that it may cut ratings of bonds to be repaid by the settlement because the Illinois case against Philip Morris “presents a different theory of liability” than previous suits against tobacco firms.
