S&P reduces rating on bonds backed by tobacco settlement

Suits, other factors affect $18 billion in municipals

April 19, 2003|By BLOOMBERG NEWS

NEW YORK -Standard & Poor's cut the credit ratings yesterday on $18 billion in municipal bonds backed by payments cigarette makers owe the states, blaming 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," Standard & Poor's said.

Also contributing to the ratings downgrades was a report by Philip Morris USA that cigarette shipments fell by 16 percent in the first quarter.

"The first-quarter volume decline is outside of what was expected," said C. Eric Hedman, an S&P analyst.

The tobacco-settlement municipal bonds were sold by several jurisdictions, including San Diego and Sacramento counties in California, plus New York and Rockland counties in New York state, and municipalities in Alabama. Standard & Poor's will review all of its ratings on bonds backed by the $246 billion that cigarette makers agreed to pay the states after being sued in the 1990s over smoking-related illnesses, Hedman said, noting that there may be additional cuts.

The ratings of most tobacco settlement bonds were based on a forecast of a 5 percent decline in cigarette shipments by the four companies in the settlement, Standard & Poor's said.

But first-quarter shipments for Philip Morris, R.J. Reynolds Tobacco Co., Brown & Williamson Tobacco Corp. and Lorillard Tobacco Co. fell 12.9 percent to 88.2 billion cigarettes, according to Management Science Associates.

S&P noted the risk of litigation after Philip Morris, the world's largest cigarette maker, threatened to default on its $2.6 billion payment due April 15 under the settlement.

Altria Group Inc., Philip Morris' parent, threatened to default after losing a class action lawsuit in Illinois last month and was forced to post a $12 billion bond. The bond was reduced Monday and the company made its payment.

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