It appears as if the Justice Department's recently filed tobacco suit could delay, or at least extinguish, New York City's hopes for an early October sale of bonds backed by tobacco-settlement funds.

An official in the New York City comptroller's office acknowledged that the Justice Department announcement will cause some delay in bringing the tobacco settlement-backed bonds to market, despite many observers largely expecting the suit.

At this stage, the likely cause for a delay would be the need for the major rating agencies to reevaluate the proposed bond offering in light of the Justice Department suit, before providing ratings.

The rating agencies, however, differ over the estimable effects of the litigation.

Michael Kanes, senior structured finance analyst at Moody's Investors Service, said that President Clinton announced in his State of the Union address that he would recommend the Justice Department file such a suit, so Justice's action was anticipated. As such, it was one of several scenarios Moody's used to test the strength of a tobacco-bond deal, and it was deemed to have negligible effects.

"Nobody knows how the federal suit will play over time," Kanes said. "However, Moody's believes its modeling is robust enough to adequately account for the vast majority of reasonable outcomes. Because of this, we do not believe there is significant additional problems to securitization."

Standard & Poor's Ratings Group was more equivocal about the impact the federal suit might have on the ratings process. Chris Howley, associate director of the structured finance group, said the rating agency's approach was "still developing" and that it was "awaiting more of the details [of the lawsuit] to flow in."

He said the structured finance group was also in discussions with the corporate rating group to determine how they believe the Justice Department filing might impact tobacco companies themselves.

Howley said the potential impact of the suit will in part depend upon the size of the claim and the basis for the lawsuit, and the theories on which the claim is based. S&P will have to consider what is the basis for the claim and how it could affect the state settlement, he added.

Salomon Smith Barney is lead manager for the proposed sale, with Bear, Stearns & Co. and J.P. Morgan as co-managers.

Market sources said that in light of some of the renewed uncertainty emerging from the filing, they believe any remaining chance the city had for an early October sale of tobacco settlement-backed bonds is now up in smoke. The earliest this may come is in the second half of the month, they said.

While a delay seems inevitable, sources said that the bigger concern for the city right now is that the delay might drag on into the customary late year rush of municipal bond issuance and also into any lingering Y2K fears.

Although the Justice Department announcement was short on details, the objective seems to be to win a payout that would more than double what the states will be receiving over the next 25 years. There were some estimates that the suit may seek to recoup at least $20 billion per year, which is reported to be the cost of smoking related health claims paid to veterans, military personnel, federal employees and the elderly.

Last year the tobacco companies signed a landmark agreement with 46 states that provides for the payment of $206 billion over 25 years to cover their Medicaid costs. Together with separate agreements with other states, the tobacco companies are already committed to payouts of about $250 billion over the 25-year span.

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