MOODY'S CONFIRMS RATINGS OF TOBACCO COMPANIES; OUTLOOKS UNCHANGED
New York, September 23, 1999 -- Moody's Investors Service confirmed the ratings of four tobacco companies competing in the U.S. market, following the federal court filing by the U.S. Department of Justice of a lawsuit against several tobacco companies. Moody's also confirmed the stable outlooks of these companies. Moody's noted that the filing of the lawsuit is not unexpected and follows several announcements by the Federal government that it was considering such action. Moody's also noted that the pretrial hearings that are likely to occur should have significant bearing on the outcome of the legal action.
The lawsuit alleges that tobacco companies have engaged in a campaign of fraud and deceit to conceal from the public and the government the negative health effects of smoking. It intends to recover the amounts spent by the Federal government that can be tied to treating smoking-related illness, under programs such as Medicare. Moody's believes that during pretrial hearings and the trial itself (if it is allowed to proceed), the lawsuit would face several hurdles. These include (1) the ability of the government to sue directly on its own behalf. Should this ability be rejected, the government's only option should it decide to continue going forward might be to sue on behalf of individuals for whom it incurred medical expenses. This is a less efficient course of action since most third-party suits have been disallowed in the past. (2) The use of certain of the statutes mentioned as basis for the legal action (for instance, Medical Care Recovery Act and Medicare Secondary Payer Act) might be challenged as inapplicable to the lawsuit. Also, (3) the government might have to prove that it was deceived. In that case, evidence such as federally-mandated warning labels on cigarette packages could be considered proof that the government had been substantially aware of the dangers of smoking. A 1997 decision by the Department of Veterans Affairs to block payments for benefits related to smoking-related illnesses might be construed as a sign that the federal government has believed in individual responsibility in matters of smoking in the past.
Should the case proceed to trial, Moody's believes that the pre-trial hearings will have significant influence on the strength of each party's case, by defining the defense arguments left available to tobacco companies during the trial, as well as the burdens of proof that the government will have to meet. Moody's believes that if the government's case is bolstered by the hearings, tobacco companies might seek a settlement, which would lead to payments by tobacco companies spread out over several years. Such payments could result in an increase in the price of a pack of cigarettes possibly exceeding $0.10 a pack. Should such an event occur, the ratings of tobacco companies would be under varying degrees of pressure from the resulting drop in consumption.
The following companies ratings are confirmed and stable outlooks maintained following the announcement of the Department of Justice's filing:
Philip Morris Companies, Inc. and its guaranteed subsidiaries: long-term debt rated A2 and Prime-1 rating for commercial paper.
R.J. Reynolds Holdings, Inc.: 144A issue and revolving credit facility rated Baa2 based on a guarantee from R.J. Reynolds Tobacco Company.
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.
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