Australian state and federal governments are considering taking legal action against tobacco companies similar to that which resulted in a US$246 billion settlement in the U.S. and the creation of a new class of securitized asset: tobacco settlement receivables.

The process is at an early stage, with government solicitors at state and federal level in Australia and New Zealand agreeing to look at the possibility of a joint action that would force the tobacco industry to contribute to the costs of smoking-related healthcare.

State and territory Crown solicitors in Australia and the Australian government solicitor have formed a working party to prepare grounds for a case and assess the possibility of its success.

The question of financing such an action is evidently high on the agenda with the Attorney-General for the state of Victoria, Rob Hulls, who has suggested publicly that private law firms should be involved in the action, as they were in the U.S. From the point of view of government lawyers, this has two advantages: private lawyers have deeper expertise in commercial litigation, particularly on the plaintiff side; and, by working on a success fee basis, they might be able to shoulder part of the financial risk.

Earlier this year, Hulls held discussions with U.S. plaintiff lawyers involved in that country's settlement. The talks are believed to have focused on legal strategy rather than financing concepts. Already, however, securitization professionals in Australia have said they can see no technical reason why a "tobacco bond" style of financing could not be used.

Any settlement would inevitably be much smaller than that in the U.S., given Australia's relative size and its more conservative approach to determining compensatory sums. By Australian standards, the sums involved could be large, however, with smoking-related healthcare costs estimated to run into the "billions of dollars" each year.

As one lawyer emphasized, legal action is not yet a certainty and a settlement, if one arises, could be years away. Any confrontation would have a "David and Goliath" quality with the governments likely to be represented by small but aggressive law firms that specialize in class actions, such as Maurice Blackburn Cashman and Slater & Gordon, both based in Melbourne.

The firms representing the tobacco companies will be among the country's largest. Ironically, these are also the firms with the deepest expertise in securitization. A senior partner and securitization specialist at one such firm declined to comment, citing a potential conflict of interest.

In terms of current deal activity, the focus remains on the domestic market. Volume securitizers more accustomed to issuing offshore are seeing new value domestically, as existing lines of mortgage-backed securities run off and as the borrowers become more adept at structuring their deals to appeal to different market segments.

St. George, for example, achieved ball park pricing on a A$600 million (US$356 million) domestic mortgage-backed issue (ASRI 3/27/2000 p1) via its Crusade Trust which, under market circumstances, the bank regarded as a highly pleasing result.

The deal, Crusade Trust No. 1A of 2000, was the second biggest in the domestic sector following a A$750 million transaction earlier in the year by PUMA Finance. CT1A was split into a A$345 million fixed-rate tranche with a soft bullet, October 15, 2002, maturity; and a A$255 million floating-rate tranche with a 6.5 year expected average life.

The tranches, both rated AAA by Standard & Poor's and Fitch IBCA, were priced at 72 basis points over Commonwealth bonds and 44 basis points over 30-day bank bills respectively. The fixed rate margin to bond was equivalent on the day of pricing to 26 basis points over swap which, in turn, was at the higher end of the 24 to 26 basis point spread over swap at which the deal had been marketed.

Pricing on the FRN, by contrast, was at the bottom end of the 44 to 46 basis point marketing range. The deal coincided with volatility in the credit markets and the tighter pricing on the FRN relative to the fixed rate tranche appeared to reflect investors' concerns.

St. George said that the overall pricing worked out to 34 basis points over swap on a weighted average margin over time basis, which was inside recent transactions by PUMA and Commonwealth Bank of Australia.

After the St. George transaction, PUMA returned to the market with a A$630 million deal through its Masterfund P-6 Series A and Series B. The deal - which was jointly lead managed by Deutsche Bank and Macquarie Bank which, through a subsidiary, manages PUMA - reverted to quarterly pass-throughs after a short initial fixed rate period.

It incorporated a call option for the outstanding principal, expected to be A$330 million, and had an expected final maturity of July 2002 and a legal final maturity of February 15, 2030.

The notes, which were rated triple-A by Standard & Poor's and Moody's Investors Service, were marketed at 20 to 23 basis points over the bank bill swap rate and priced at the higher end of the range.

Deutsche Leads After First Quarter

Deutsche Bank was the top lead manager of domestic securitized bonds during the first quarter, according to Thomson Financial Securities Data, with three deals totaling A$1.123 billion. The investment bank accounted for nearly 40% of the market, which totaled A$2.821 billion.

Macquarie Bank (incorporating the former Bankers Trust securitization team) came second with three deals totaling A$875 million, followed by ABN AMRO (one deal worth A$300 million), SG Australia (three deals, A$201.3 million), CBA (one deal, A$165 million) and Warburg Dillon Read (one deal, A$157.6 million).

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