Last week's decision by the Florida Supreme Court to not intervene in Florida's tobacco class-action lawsuit -whereupon the tobacco companies could be forced to pay as much as $500 billion dollars in settlement - has caused the rating agencies to raise a collective eyebrow.
The fact is, as an investor noted, the bonds draw from the same pooled revenue streams as would a future settlement, including Florida's class-action suit.
However, the Supreme Court made it clear that both parties would be able to appeal any decision after a verdict was rendered. And so far, in the history of tobacco litigation, no class-action suit has survived, noted Bern Fischer of Standard & Poor's Ratings Services.
As to whether or not this settlement could possibly affect the tobacco ABS transactions from New York remains unclear.
"It's difficult to tell," said Fischer. "But we've factored severe stresses into the tobacco securitization transactions. We can't rate on unknowns. We can only rate on foreseeable events. I'm not sure that a judgment of that size is necessarily foreseeable quite yet."
Furthermore, S&P contends that, while they are most definitely keeping a close eye on the lawsuit, the initial ratings took into account situations like this one, and considered the impact on the bonds issued by New York City and Nassau County, N.Y.
"Part of our analysis here at S&P was to stress the cash flows for a number of scenarios," said Chris Howley. "One scenario was another settlement as large as the MSA, and the cash flows to New York City and Nassau, to varying degrees, survived such an additional settlement."
Also, Howley said, S&P ran a scenario to see how the bonds would perform in the event of a payment stoppage, such as a bankruptcy filing or Chapter 11.
"These stress scenarios were applied at different points in time over the life of the bonds. The transactions, New York City and Nassau, performed differently, but to a large extent there would be continuation of payments, at least over a number years," Howley said. "It may not last through, say, eight years of chapter 11 filing, but the deals continue to perform [in our scenarios] even though payments from participating manufactures may have stopped."
The bonds are equipped with "triggers" that allow the bond holders to collect what would otherwise be paid to the issuers.
"The triggers are to protect against a number of probabilities, and various declines in credit strength and consumption levels," Howley said. "To the extent that tobacco sales decline because of, for example, an increase in cost to consumers, the idea is that these traps would be an effective way of trapping the cash that would otherwise be released to the bond holders."