These are trying times for the nation's cigarette manufacturers. Beleaguered industry executives are likely to light up and head out to Marlboro Country to get away from it all.

But for the folks at the rating agencies, there is no sense of urgency evident, even as the bad news mounts.

Michael Kanes, vice president and senior analyst at Moody's Investors Service, said that his agency has already been factoring a number of adverse eventualities into its analysis and they are not surprised by the latest developments.

At Standard & Poor's Ratings Group, Chris Howley, associate director of the structured finance group, said that a bankruptcy analysis will be key to S&P's ratings for any proposed structured finance deals. Specifically, he added, an important question will be whether a deal structure will address this possibility.

Behind the latest pronouncements from the rating agencies are the just-issued jury verdict in the Florida class-action suit and smoke signals emanating from the Indian Nation seeking a separate settlement with the tobacco industry.

Despite the problems rating agency sources do not believe state efforts to securitize their allocations will be evaporating as a result, although they might have to wait longer for ratings and may need some creative structuring to deal with a riskier future.

This does not mean state officials can breathe easier, however. There are still many hurdles to be crossed before the first offering comes to market, not the least of which are resident within state and local governments.

Many municipalities still have to pass enabling legislation and sign off on the agreement. For its part, Moody's analysis assumes the 1999 deadline for 80% of the states to enact legislation approving the master settlement will not be met. Instead, Moody's officials are using a mid-2000 fallback date as the kick-off time.

There are some efforts to play down the significance of the current turn of events, with Moody's Kanes noting that the Florida case has only completed its first stage. The second phase could bog down into hundreds of thousands of individual cases, as individual plaintiffs prove their damage claim.

However, Kanes said this development has to be built into the "stress scenario," for any rating.

The filing of a suit by attorney Turner Branch in New Mexico on behalf of 34 Native American tribes could lead to more suits by other tribes, just as the Florida verdict is likely to spawn more class action cases. However, analysts said this suit is for only $400 million and, in the framework of the $200 billion-plus settlement, is seen as insignificant.

Analysts at another rating agency said they were not totally surprised by the Florida decision and believe it will be appealed. Overall, they believe these developments will be the basis for some further detailed discussions and could tie up the timing of a ratings decision. But none of these developments, including an overseas suit filed by France and some possibility the Federal government may seek as stake, will break up the giant settlement, according to these analysts.

Some analysts also commented that their legal experts advise that the Florida's class action laws are probably the most plaintiff friendly in the nation and even though more suits are to be expected, Florida may not be a trendsetter.

Nevertheless, at Moody's, class action and other suits as well as a resolution of numerous legal issues relating to the national settlement are among the key risk items for these transactions.

Ironically, Kanes said, one of the largest potential risks for the tobacco settlement would be a cultural shift in U.S. cigarette consumption. If people suddenly ceased smoking, the cash flows to pay for the settlements would just stop. - David Feldheim

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