The recent passage of a Florida bill sheltering tobacco companies from the likelihood of posting an extremely expensive bond to appeal judgement in the landmark tobacco class-action suit could have a beneficial effect on tobacco securitizations, experts say.
"We are keeping a watch on the legislative proposals currently pending before a number of state legislatures," said Chris Howley, an associate director at Standard and Poor's Ratings Services. "And to the extent that they would prevent the posting of a large bond, then that could benefit the securitizations to the extent that prevents the interruptions of the cashflows flowing from the participating manufacturers."
The legislation was passed just in time for the start of the punitive damage phase of the Florida trial, which begins today. Under the measure, tobacco manufacturers could choose to either post a bond amounting to $100 million or pay one-tenth of the company's net worth. Similar legislation has been proposed in four other states: North Carolina, Virginia, Georgia and Kentucky.
The newly-passed law alleviates any kind of short-term risk of bankruptcy for the tobacco companies that would result from the requirement to post a bond to appeal a punitive damage award, another source said. Without this measure, Florida law would have required the tobacco manufacturers to come up with 120% of the total punitive award, which could place the defendant companies in financial jeopardy.
"Any legislation that would otherwise prevent the posting of an extremely large bond as a result of a substantial damage award against the industry obviously alleviates some of the concerns about the industry's potential bankruptcy," Howley added.
"With the cap in place, it will allow tobacco companies to appeal the judgment which many legal experts feel they will win on appeal," said the source. "The concern was that without the cap, in order to appeal the judgment, they would have to post a bond in excess of the judgment, which in the event of a huge punitive damage award, the companies would be unable to do."
In a related development, an individual lawsuit against tobacco manufacturers was commenced in a Brooklyn court recently, the first tobacco litigation to go to trial in New York.
According to published reports, the plaintiff in the case, who started smoking before government-mandated warnings were placed on cigarette packages, accused the companies of concealing the dangers of smoking before 1969, when these warnings were started.
As to this trial's effect on the existing securitizations, the source said, "It's way too early to say what the status would be."