MOODY'S CONFIRMS RATINGS OF TOBACCO COMPANIES; OUTLOOK STABLE
Moody's Investors Service confirmed the ratings of four major tobacco companies competing in the U.S. market, following the recent verdict of a jury in the Engle case finding the companies liable for the injuries contracted by three Florida smokers. Moody's also confirmed the stable outlooks of these companies. The confirmations and stable rating outlooks reflect Moody's view that, while this verdict opens the way to the award of possibly large punitive damages in a few weeks, the companies will be able to appeal the class action structure of the case to higher courts. Moody's also believes that the probability is low that tobacco companies will have to post a bond in an amount that exceeds their financial capacity. However, Moody's views the unusual structure of Engle as a source of high uncertainty in future proceedings of this case. Moody's believes that this uncertainty -- enhanced by the fact that past rulings of the Third District Court of Appeals and the Florida Supreme Court in Engle have been adverse to the companies -- could lead to unexpected judicial decisions until final resolution.
The Engle case is structured in three phases. At the end of Phase I, a jury found that the tobacco industry had been intentionally deceitful about the dangerous effects of smoking. In the first stage of Phase II, the same jury found the companies liable for the injuries of three Florida smokers representative of the class, and awarded compensatory damages for two of them. In the case of the third class representative, the jury found his claim barred by the Florida statute of limitations. In the second stage of Phase II, the same jury will be asked to award punitive damages to the entire class of Florida smokers. Only after this second stage will the companies have the possibility to appeal the trial plan defined by the lower court. In Phase III, individual trials with different juries will take place to determine membership in the class. At the end of Phase III, punitive damages awarded at the end of Phase II will be distributed equally among all members of the class.
Moody's believes that the probability remains high that Engle will ultimately be decertified on appeal. In many precedents, tobacco cases have been found by higher courts unfit for class-action status because individual circumstances predominate over common ones. Moody's believes that the companies will appeal the trial plan with high probability of success within the Florida court system or the US Supreme Court. Past decisions by the Third District Court of Appeals and the Florida Supreme Court -- while adverse to the companies on technical features of the trial -- have clearly left open the possibility of future appeals on the very structure of Engle. Because of the strong chances of decertification on appeal, Moody's believes that the companies will not seek to settle Engle. In the case of an ultimate decertification -- which would eliminate possibly large contingent liabilities for the companies -- the companies would be faced with individual trials in Florida. While certain recent individual trial jury decisions on the West Coast have been adverse to the companies, no pattern has yet emerged that would indicate a risk of significant payments in the aggregate. Moody's will continue to carefully monitor the outcome of individual trials, including whether jury sentiment begins to shift. However, the impact of such a shift would not be felt for many years, because of the low number of individual cases that reach trial every year.
Moody's also believes that the probability is remote that the companies will be led to bankruptcy by a bond requirement that would exceed their financial capacity. First, the jury might use its discretion to award manageable punitive damages. Further protection is provided by the fact that the trial court judge must review punitive damages for reasonableness. Second, a bond is usually required to stay an executable judgment (i.e. to temporarily prevent a plaintiff from moving against the assets of the party found liable if this party does not pay the award). To the extent that the Engle trial plan itself determines that the identity of all members of the class will not be known until the end of Phase III (possibly decades from now, given the potential size of the class and the limited capacity of any court system -- including Florida's -- to process a high number of individual cases), there are grounds to consider the award of punitive damages a non-executable judgment until then, eliminating the requirement of a bond. Third, assuming that a bond requirement would still be imposed by the lower court, the companies would have the possibility to appeal this requirement under a separate and faster legal track, possibly up to the US Supreme Court. While they appealed this requirement, the companies would not have to post a bond in Florida.
Also, assuming that an entity representing future plaintiffs was allowed to put up a lien against the companies' assets, such an entity would have to move first against the Florida assets of the companies. These assets are of insignificant value. In a second stage, the entity would approach courts in various tobacco asset-rich states in order to obtain the posting of a lien against these assets, on the face of the Florida judgment. Assuming that the courts in these states would accept the requests, the companies would be protected by various laws recently passed or in the process of being passed by state legislatures in Georgia, North Carolina, Kentucky and Virginia. These laws cap at low levels the amounts of the bonds to be posted as a result of out-of-state court decisions. In this scenario, tobacco companies can appeal the Engle case while posting manageable bonds in these various states. Although these new laws could be subject to legal challenge, they at the very least significantly push out the point at which the tobacco companies might need to post a very substantial bond. Still, a situation where an entity would attempt to move against assets in these states would be highly disruptive to the companies' operations.
Moody's has carefully reviewed the indentures and bank agreements of the companies. Reflecting the fact that any adverse court decision at the end of Phase II is almost certain to be stayed within a short period, such a decision should not trigger an event of default under any of the companies' legal documents.
The following companies' ratings are confirmed and stable outlooks maintained following the jury verdict in Phase II of the Engle case:
Philip Morris Companies, Inc. and its guaranteed subsidiaries: long-term debt rated A2 and Prime-1 rating for commercial paper.
R.J. ReynoldsTobacco Holdings, Inc.: 144A issue and revolving credit facility rated Baa2 based on a guarantee from R.J. Reynolds Tobacco Company. Other long term debt rated Baa3
British American Tobacco plc and its guaranteed subsidiaries: long-term debt rated A2 and Prime-1 rating for commercial paper.
Loews Corporation: long-term debt rated A1.
Philip Morris Companies, Inc., headquartered in New York, is the world,s leading cigarette manufacturer and is a major global food company.
R.J. Reynolds Tobacco Holdings, headquartered in North Carolina, is the parent company of R.J. Reynolds Tobacco Company. R.J. Reynolds Tobacco Company is the second largest tobacco company in the United States.
British American Tobacco plc, headquartered in London, is one of the world's leading international producer of cigarettes.
Loews Corporation is a diversified holding company with subsidiaries engaged in insurance, cigarette production, the operation of hotels, the operation of oil and gas drilling rigs, and the distribution and sale of watches.
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