A recent decision from a New York appellate court could cut into cash flows supporting the state's tobacco bond deals, according to a report from Moody's Investors Service.

The ruling calls into question the legality of New York state laws written to enforce the 1998 Master Settlement Agreement, which the court said could allow for price-fixing arrangements among tobacco companies.

Most of these bonds are in the tax-exempt market, Moody's Senior Vice President Nicolas Weill said. At this point, the rating agency does not expect the decision to impact transactions backed by litigation fees.

"The only possible impact would be to the extent that either the MSA or the creditworthiness of tobacco companies were affected; for the time being, we don't see this as a factor," he said.

So far, secondary prices haven't felt the implications. Yields in the tobacco bond market have fallen recently as prices have rebounded, and more municipalities are trying to offer new unenhanced deals, reported the Bond Buyer, a sister publication of ASR.

However, traders are taking note of this most recent setback.

"I've talked to a couple of people . . . and we all agree that this will hinder bond trading for a while," First Southwest Co. Vice Chairman Michael Marz told the Bond Buyer.

A final ruling in this case is expected in late spring.


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