New York, 03-31-98 -- Moody's Investors Service confirmed the ratings of five tobacco companies competing in the U.S. market, but expressed a very negative outlook for the ratings following the release of the Senate Commerce Committee's summary of the draft legislation entitled "National Tobacco Policy and Youth Smoking Reduction Act." Moody's believes that certain central features of the draft legislation would, to varying degrees, seriously weaken the ability of these companies to retain their current ratings. These features include: the size of the annual payment required of the industry, the de-linking of the payment requirements and future declines in cigarette consumption, and the size and non-tax-deductible status of penalties relating to a failure to reach targets for reducing under-age usage.
The current draft legislation does not yet address the critical issue of relief from civil litigation. However, even if the draft legislation were to eventually incorporate such relief, the financial payments incorporated in the draft are so burdensome that it is uncertain whether any company would retain its current rating, and some companies could experience material downgrades. In the absence of meaningful protection from future litigation, the negative impact of the current proposal on the credit quality of rated companies would be further exacerbated.
Moody's noted that in June of 1997, it confirmed the rating of the U.S. tobacco industry following the announcement of settlement proposal agreed on by the industry and certain state attorneys general. That confirmation reflected our expectation that each company in the industry would have a variety of options available to help moderate the erosion in debt protections that would result from the proposal, and that any erosion which did occur could be adequately offset by a significant degree of insulation from future litigation risk.
The following companies ratings are confirmed and negative outlooks maintained following the announcement of the recent draft legislation:
Philip Morris Companies, Inc. and its guaranteed subsidiaries: long-term debt rated A2 and Prime-1 rating for commercial paper.
RJR Nabisco, Inc. and its guaranteed subsidiaries: long-term debt rated Baa3 and Prime-3 rating for commercial paper.
B.A.T Industries plc and its guaranteed subsidiaries: long-term debt rated A2 and Prime-1 rating for commercial paper.
Loews Corporation: long-term debt rated A1.
UST: Prime-1 rating for commercial paper.
Following is a summary comparison between the draft legislation and the June 1997 proposal:
Total Industry Payments: Under the terms of the draft legislation total industry payments will approximate $575 billion over 25 years compared with $368 billion under the June 1997 proposal. This represents a substantial 56% increase.
Lack of Adjustment for Lower Consumption Levels: The draft legislation requires specific, non adjustable payment levels during the first five year after enactment: $14.4 billion in 1999, $15.4 billion in 2000; 17.6 billion in 2001, $21.2 billion in 2002, and $23.6 billion in 2003. These payment levels are required irrespective of any future declines in cigarette consumption. However, it is likely that the base historic rate of about 2.0% per year declines in consumption will continue. In addition, the payment levels required by the draft legislation will result in significant price increases, which will in turn precipitate sharp declines in consumption. Under the draft legislation, payment levels are not adjusted for declines in consumption until 2004.
In contrast, under the June 1997 proposal, annual payment levels would be adjusted downward by the annual percentage decline in consumption. This adjustment mechanism would be operative during the second year after enactment. As a result of this volume adjustment process, payments due under the June 1997 agreement are similar in nature to an excise tax which also varies directly with volume.
The impact of the draft legislation is that during the first five years after enactment, the dollar amount paid by the industry is likely to be about 80% higher than under the June 1997 proposal. In addition, because the draft legislation sets an absolute and unadjusted payment level for the industry, Moody's would view these payments much like a regulatory or legislated fixed charge. Consequently the industry's debt protection measures and ability to service its major financial fixed charge – interest expense – would be severely eroded.
Underage Tobacco Usage Targets: The draft legislation proposes an annual yearly cap of $3.6 billion on penalties to be paid by the industry for not reaching targets for reducing underage smoking. In addition, these penalties would not be tax deductible. The June 1997 proposal set a cap of $2.0 billion for not reaching the same target levels, and treated these payments as tax deductible expenses.
Litigation: The draft legislation does not address the issue of any type of protection from litigation for the industry. In contrast, the June 1997 proposal would: settle present federal, state medical cost recoupment, and class actions litigation; bar similar actions in the future; preserve the rights of individuals to sue but set caps on total annual payments by the industry; and, allow claims for punitive damages only to the extent that such claims were based on industry conduct taking place after enactment of the proposal.
Moody's believes that meaningful legislative protection from litigation will be a critical element of industry participants to retain current rating levels. In the absence of such protection, state and federal authorities will have considerable latitude to extract very high payment streams from the industry, without providing the industry with relief from the oppressive cloud of litigation risk.
© 2021 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.
CREDIT RATINGS ISSUED BY MOODY'S CREDIT RATINGS AFFILIATES ARE THEIR CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES, AND MATERIALS, PRODUCTS, SERVICES AND INFORMATION PUBLISHED BY MOODY’S (COLLECTIVELY, “PUBLICATIONS”) MAY INCLUDE SUCH CURRENT OPINIONS. MOODY’S DEFINES CREDIT RISK AS THE RISK THAT AN ENTITY MAY NOT MEET ITS CONTRACTUAL FINANCIAL OBLIGATIONS AS THEY COME DUE AND ANY ESTIMATED FINANCIAL LOSS IN THE EVENT OF DEFAULT OR IMPAIRMENT. SEE APPLICABLE MOODY’S RATING SYMBOLS AND DEFINITIONS PUBLICATION FOR INFORMATION ON THE TYPES OF CONTRACTUAL FINANCIAL OBLIGATIONS ADDRESSED BY MOODY’S CREDIT RATINGS. CREDIT RATINGS DO NOT ADDRESS ANY OTHER RISK, INCLUDING BUT NOT LIMITED TO: LIQUIDITY RISK, MARKET VALUE RISK, OR PRICE VOLATILITY. CREDIT RATINGS, NON-CREDIT ASSESSMENTS (“ASSESSMENTS”), AND OTHER OPINIONS INCLUDED IN MOODY’S PUBLICATIONS ARE NOT STATEMENTS OF CURRENT OR HISTORICAL FACT. MOODY’S PUBLICATIONS MAY ALSO INCLUDE QUANTITATIVE MODEL-BASED ESTIMATES OF CREDIT RISK AND RELATED OPINIONS OR COMMENTARY PUBLISHED BY MOODY’S ANALYTICS, INC. AND/OR ITS AFFILIATES. MOODY’S CREDIT RATINGS, ASSESSMENTS, OTHER OPINIONS AND PUBLICATIONS DO NOT CONSTITUTE OR PROVIDE INVESTMENT OR FINANCIAL ADVICE, AND MOODY’S CREDIT RATINGS, ASSESSMENTS, OTHER OPINIONS AND PUBLICATIONS ARE NOT AND DO NOT PROVIDE RECOMMENDATIONS TO PURCHASE, SELL, OR HOLD PARTICULAR SECURITIES. MOODY’S CREDIT RATINGS, ASSESSMENTS, OTHER OPINIONS AND PUBLICATIONS DO NOT COMMENT ON THE SUITABILITY OF AN INVESTMENT FOR ANY PARTICULAR INVESTOR. MOODY’S ISSUES ITS CREDIT RATINGS, ASSESSMENTS AND OTHER OPINIONS AND PUBLISHES ITS PUBLICATIONS WITH THE EXPECTATION AND UNDERSTANDING THAT EACH INVESTOR WILL, WITH DUE CARE, MAKE ITS OWN STUDY AND EVALUATION OF EACH SECURITY THAT IS UNDER CONSIDERATION FOR PURCHASE, HOLDING, OR SALE.
MOODY’S CREDIT RATINGS, ASSESSMENTS, OTHER OPINIONS, AND PUBLICATIONS ARE NOT INTENDED FOR USE BY RETAIL INVESTORS AND IT WOULD BE RECKLESS AND INAPPROPRIATE FOR RETAIL INVESTORS TO USE MOODY’S CREDIT RATINGS, ASSESSMENTS, OTHER OPINIONS OR PUBLICATIONS WHEN MAKING AN INVESTMENT DECISION. IF IN DOUBT YOU SHOULD CONTACT YOUR FINANCIAL OR OTHER PROFESSIONAL ADVISER.
ALL INFORMATION CONTAINED HEREIN IS PROTECTED BY LAW, INCLUDING BUT NOT LIMITED TO, COPYRIGHT LAW, AND NONE OF SUCH INFORMATION MAY BE COPIED OR OTHERWISE REPRODUCED, REPACKAGED, FURTHER TRANSMITTED, TRANSFERRED, DISSEMINATED, REDISTRIBUTED OR RESOLD, OR STORED FOR SUBSEQUENT USE FOR ANY SUCH PURPOSE, IN WHOLE OR IN PART, IN ANY FORM OR MANNER OR BY ANY MEANS WHATSOEVER, BY ANY PERSON WITHOUT MOODY’S PRIOR WRITTEN CONSENT.
MOODY’S CREDIT RATINGS, ASSESSMENTS, OTHER OPINIONS AND PUBLICATIONS ARE NOT INTENDED FOR USE BY ANY PERSON AS A BENCHMARK AS THAT TERM IS DEFINED FOR REGULATORY PURPOSES AND MUST NOT BE USED IN ANY WAY THAT COULD RESULT IN THEM BEING CONSIDERED A BENCHMARK.
All information contained herein is obtained by MOODY’S from sources believed by it to be accurate and reliable. Because of the possibility of human or mechanical error as well as other factors, however, all information contained herein is provided “AS IS” without warranty of any kind. MOODY'S adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources MOODY'S considers to be reliable including, when appropriate, independent third-party sources. However, MOODY’S is not an auditor and cannot in every instance independently verify or validate information received in the rating process or in preparing its Publications.
To the extent permitted by law, MOODY’S and its directors, officers, employees, agents, representatives, licensors and suppliers disclaim liability to any person or entity for any indirect, special, consequential, or incidental losses or damages whatsoever arising from or in connection with the information contained herein or the use of or inability to use any such information, even if MOODY’S or any of its directors, officers, employees, agents, representatives, licensors or suppliers is advised in advance of the possibility of such losses or damages, including but not limited to: (a) any loss of present or prospective profits or (b) any loss or damage arising where the relevant financial instrument is not the subject of a particular credit rating assigned by MOODY’S.
To the extent permitted by law, MOODY’S and its directors, officers, employees, agents, representatives, licensors and suppliers disclaim liability for any direct or compensatory losses or damages caused to any person or entity, including but not limited to by any negligence (but excluding fraud, willful misconduct or any other type of liability that, for the avoidance of doubt, by law cannot be excluded) on the part of, or any contingency within or beyond the control of, MOODY’S or any of its directors, officers, employees, agents, representatives, licensors or suppliers, arising from or in connection with the information contained herein or the use of or inability to use any such information.
NO WARRANTY, EXPRESS OR IMPLIED, AS TO THE ACCURACY, TIMELINESS, COMPLETENESS, MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE OF ANY CREDIT RATING, ASSESSMENT, OTHER OPINION OR INFORMATION IS GIVEN OR MADE BY MOODY’S IN ANY FORM OR MANNER WHATSOEVER.
Moody’s Investors Service, Inc., a wholly-owned credit rating agency subsidiary of Moody’s Corporation (“MCO”), hereby discloses that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferred stock rated by Moody’s Investors Service, Inc. have, prior to assignment of any credit rating, agreed to pay to Moody’s Investors Service, Inc. for credit ratings opinions and services rendered by it fees ranging from $1,000 to approximately $5,000,000. MCO and Moody’s Investors Service also maintain policies and procedures to address the independence of Moody’s Investors Service credit ratings and credit rating processes. Information regarding certain affiliations that may exist between directors of MCO and rated entities, and between entities who hold credit ratings from Moody’s Investors Service and have also publicly reported to the SEC an ownership interest in MCO of more than 5%, is posted annually at www.moodys.com
under the heading “Investor Relations — Corporate Governance — Director and Shareholder Affiliation Policy.”
Additional terms for Australia only: Any publication into Australia of this document is pursuant to the Australian Financial Services License of MOODY’S affiliate, Moody’s Investors Service Pty Limited ABN 61 003 399 657AFSL 336969 and/or Moody’s Analytics Australia Pty Ltd ABN 94 105 136 972 AFSL 383569 (as applicable). This document is intended to be provided only to “wholesale clients” within the meaning of section 761G of the Corporations Act 2001. By continuing to access this document from within Australia, you represent to MOODY’S that you are, or are accessing the document as a representative of, a “wholesale client” and that neither you nor the entity you represent will directly or indirectly disseminate this document or its contents to “retail clients” within the meaning of section 761G of the Corporations Act 2001. MOODY’S credit rating is an opinion as to the creditworthiness of a debt obligation of the issuer, not on the equity securities of the issuer or any form of security that is available to retail investors.
Additional terms for Japan only: Moody's Japan K.K. (“MJKK”) is a wholly-owned credit rating agency subsidiary of Moody's Group Japan G.K., which is wholly-owned by Moody’s Overseas Holdings Inc., a wholly-owned subsidiary of MCO. Moody’s SF Japan K.K. (“MSFJ”) is a wholly-owned credit rating agency subsidiary of MJKK. MSFJ is not a Nationally Recognized Statistical Rating Organization (“NRSRO”). Therefore, credit ratings assigned by MSFJ are Non-NRSRO Credit Ratings. Non-NRSRO Credit Ratings are assigned by an entity that is not a NRSRO and, consequently, the rated obligation will not qualify for certain types of treatment under U.S. laws. MJKK and MSFJ are credit rating agencies registered with the Japan Financial Services Agency and their registration numbers are FSA Commissioner (Ratings) No. 2 and 3 respectively.
MJKK or MSFJ (as applicable) hereby disclose that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferred stock rated by MJKK or MSFJ (as applicable) have, prior to assignment of any credit rating, agreed to pay to MJKK or MSFJ (as applicable) for credit ratings opinions and services rendered by it fees ranging from JPY125,000 to approximately JPY550,000,000.
MJKK and MSFJ also maintain policies and procedures to address Japanese regulatory requirements.