The recent verdict by a jury in the second phase of the Florida tobacco class-action suit ordering defendants to pay a compensatory award of $12.7 million to three sick smokers will have no short-term impact on the ratings on either the tobacco companies involved in the case or the existing tobacco securitizations, but could have long-term ramifications, said sources at Standard & Poor's Ratings Services.

"There's no immediate effect on the ratings of the tobacco securitizations as a result of the recent decision," said Chris Howley associate director at S&P.

Although, Howley cites the Whitely lawsuit which is a litigation that may affect the judgment in pending tobacco securitizations including the Florida case because this particular suit is construed as an indication of changing jury sentiment. It was the first time a jury awarded judgment against the tobacco industry to someone who started smoking after warning labels were placed on cigarette package.

This change in jury sentiment is giving the industry a cause for concern in light of the possibility that a large, punitive judgment may be awarded to an estimated 500,000 sick Florida smokers - an amount that may reach up to $300 billion. The punitive award will be decided in the third and final phase of the Florida case, known as the Engle trial, which starts on May 15.

"In the bigger picture this is a concern; however, as far as the securitizations go, there is no immediate impact," Howley said. "In a sense there is a linkage obviously to the industry, to the extent that it becomes a greater concern and to the extent that we see additional awards being granted and those awards survive appeal. It could have an impact on the ratings of the tobacco bonds to the extent that the award reduces the cash flowing through the securitization vehicles."


The recent decision will also not have an immediate effect on any of the bonds' triggers. The bonds are equipped with "triggers" or "traps" that would allow bond holders to collect the amounts that would normally go to the residual asset holders, in this case the issuers.

Howley said that before a trigger could be hit, however, a number of things have to happen: the jury would have to return a verdict which is adverse to the industry, the verdict would have to survive the appeals process, and the payments would have to be of such size that they would diminish the cash flows fueling the securitizations.

An example of a trigger would be a consumption trap. "Let's say this decision somehow ends up reducing the amount of cigarettes which are produced, causing the number of cigarettes shipped to be decreased to a certain level. As a result, a trap would be hit," Howley noted.

He added that another trap or trigger would be a downgrade on the tobacco parent holding companies. (S&P does not have public ratings on the tobacco subsidiaries except for R.J. Reynolds Tobacco Holdings Co. The subsidiaries stand as the obligors for the securitizations.)

In regard to the ratings on the parent companies, Nicholas Riccio, a managing director at S&P said, "I do not presume that there would be a change in the rating based on where we are today.

"The compensatory award was not financially significant in itself," he added, referring to the $12.7 million award given to the plaintiffs in the Engle case. "The real issue for us is to get an idea about whatever punitive damage will be awarded. But it's not quite as simple as that because there are intervening factors, that even if the punitive award may be large, would make it less meaningful. For one, certain legislative actions in Florida may have some impact on how this progresses."

In a related development, published reports said that a group of senators met recently to discuss legislation that would protect the Florida's interest in tobacco settlement payments in the event that the tobacco companies involved in the case go bankrupt.

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