Though last week's Supreme Court tobacco ruling was a victory for the cigarette industry - where it was decided that the government does not have the authority to regulate tobacco as an addictive drug - experts say that the court order will have a limited effect on tobacco securitizations.
"The decision won't have any impact on the ratings of the three outstanding transactions - New York, Nassau and Westchester County," said Chris Howley, associate director at Standard & Poor's Ratings Service.
Though S&P factored the litigation in the rating process, Howley said that "it was not an overriding factor."
"We did consider the prospect that the Supreme Court could decide that the Food and Drug Administration did have the power to regulate the use of cigarettes," he added. "But it was one of many risks we contemplated in rating the transaction. The other risks were the individual and class-action suits as well as the U.S. Department of Justice suit."
The ruling was not much of a surprise to the industry, either.
"The expectation was, in general, that the FDA didn't have regulatory authority currently," said Mark Graham, director at Salomon Smith Barney. "Not only that, but the FDA probably wouldn't go much beyond what we have seen already."
In last week's decision the high court said that the FDA acted beyond its authority in a 1996 ruling. The FDA ruling prohibited the sale of cigarettes or smokeless tobacco to individuals under 18 and required retailers to check the identification of those below 27 (Food and Drug Administration vs. Brown and Williamson Tobacco Corp., No. 98-1152).
Though this Supreme Court ruling will only cause a minor ripple in tobacco-securitization land, market players are closely watching Florida's class-action lawsuit, where tobacco companies could be forced to pay as much as $500 billion dollars in settlement money.
"This is the biggest risk facing the industry to the extent that a large, punitive award is granted," Howley said. He added that damage to the tobacco industry may be caused by two factors: the size of the judgment and the possibility that a bond may have to be posted to secure the judgment.
If this class action suit succeeds "we would defer to our corporate analysts to see what, if any, impact the jury verdict would have on tobacco company ratings and the industry in general," Howley noted. "If we found that there was enough of an impact to hurt the cashflows to these transactions, then we would take a rating action."