Though many market players don't believe that the $145 billion punitive-damages award against the tobacco industry would put it out of business, the verdict has served as a warning sign for investors who want to buy these bonds.

"This was just Florida; there are still 49 other states who could potentially bring class-action suits against the industry," said an investor who has closely studied the bonds but has chosen not to buy them.

Though he doesn't believe that all 49 would actually bring a similar lawsuit against tobacco companies, he said there might be a couple more down the line.

"Just one more verdict can potentially bankrupt the industry," he said. "There comes a point when people are not going to pay ten dollars for a pack of cigarettes."

However, the rating agencies are not as worried. Moody's Investors Service confirmed the ratings of four major tobacco companies soon after the ruling was announced.

Officials from the rating agencies, including both Moody's and Standard & Poor's, say that there is a linkage between the ratings of the underlying tobacco companies and the ratings on the tobacco transactions. However, it is not a lockstep linkage, as a small move on the ratings of the tobacco companies may or may not result in a change in the ratings of the securitizations.

Still, investors are skeptical about these bonds in light of the fact that there is only once source for the underlying collateral.

In related news, a Denver treasury official has said that the $145 billion award is a sign that Colorado has to hedge its risk and sell off its part in the tobacco settlement. Furthermore, an Orange County official said that the reason behind securitizing the county's share in the settlement is to lock the funds now instead of "gambling" on the future survival of tobacco companies (see ASR 7/17/00).

Citing instances such as these, the investor suggested that issuers are trying to get their deals done while the timing is good, exemplifying a general lack of faith in the longevity of the underlying revenue stream.

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