Several more tobacco litigation-backed deals are in the works, according to sources familiar with the sector, with at least a few coming to market in the third quarter.
Likely candidates include law firms from states that have already produced deals, since these states, which settled outside of the Master Settlement Agreement (MSA), received the substantially larger fee awards.
Those states include Mississippi, Florida and Texas, with the counsels receiving approximately $1.44 billion, $3.43 billion and $3.3 billion, respectively.
For example, the Mississippi litigation fee award deal closing this week is backed by $315 million, less than one-fourth of the entire sum.
The face value of that deal, which is being managed by UBS Warburg, is $80 million.
The first deal, which was brought by Deutsche Bank Alex. Brown, was backed by fee awards to firms from Massachusetts, Florida, Illinois, and Hawaii. That deal, called Litigation Settlement Monotized Fees Trust (LSMFT-1), was worth $308 million, backed by an aggregate value of $1 billion in fees owed to 11 law firms.
Other likely candidates include firms from New York and California, which received substantial settlements, both exceeding $620 million.
Overall, there is more than $12 billion in fees owed, much of which can potentially be securitized.
"There has been strong interest among the firms holding fee awards since it was demonstrated through the Deutsche Bank deal that this asset could be securitized," said Ron Borod, partner and head of structured finance at Brown, Rudnick, Freed & Gesmer.
One of the challenges for the first deal was that the structures and rating agencies were having a tough time sizing up dilution risk. For most of last year, a substantial portion of the outside counsels for the various states had not yet gone through the arbitration process.
Each settlement taps the same cash stream, which is an annual $500 million allotted by the four tobacco companies for litigation. Although the additional settlements do not impact the amount of the other litigation settlements, they do impact the duration of the payment.
By the end of last year, however, only a few remained, which made LSMFT-1 possible, one source said. Counsels for Washington D.C., Maryland, and Missouri have yet to go through the arbitration process.
Apart from those three groups of lawyers, dilution risk could only arise from another large-scale class action lawsuit down the line that in turn opted to join the MSA. These settlements would then be drawing from the same annual $500 million.
"A whole lot of things would have to take place for that to happen," said Stephen Macy, an analyst at Moody's Investors Service. "But if they were to happen, the potential lawyer fees would be sizable, and that would dilute the pool. So that is sort of the wild card we had to put into our modeling."