Cashflows servicing outstanding ABS backed by tobacco litigation fees could still be in jeopardy should the Department of Justice be successful in its efforts to appeal a recent federal appellate court ruling.

The DOJ had been seeking to reclaim $280 billion in ill-gotten profits from tobacco companies under the Racketeer Influenced and Corrupt Organization (RICO) Act, a statute originally intended to prosecute the Mafia. A decision from the District of Columbia Court of Appeals earlier this month threw out the possibility of extracting a substantial financial reward. However, government lawyers have made clear their intention to appeal, according to published reports.

An earlier report from Moody's Investors Service found that an award in the billions of dollars could be enough to hamper the financial flexibility of tobacco companies, potentially limiting the cashflows available to service debt (see ASR, 9/13/05). None of the outstanding ABS bonds are currently on review for rating action, however, that could change depending upon the outcome of the DOJ's appeal, a rating analyst said.

Despite the lingering uncertainty, the initial ruling from the District of Columbia prompted Moody's to affirm the corporate ratings of Altria Group Inc., British America Tobacco, Loews Corp. and Reynolds America. "The affirmation reflects the elimination of substantial legal risk presented by the Department of Justice case against the cigarette industry," Moody's analysts said in a release.

If the government seeks review of the panel ruling, Moody's would likely place the ratings under review for possible downgrade if the ruling was reversed and disgorgement allowed, analysts added. The ratings outlook for all four companies remains negative due largely to continuing legal risk.

The most recent ABS transaction backed by tobacco litigation fees came via Lehman Brothers last August. The $159 million offering has maintained its original triple-B rating, and marks the bank's debut in the asset class (see ASR, 8/2/04).

Copyright 2005 Thomson Media Inc. All Rights Reserved.

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