MOODY'S CONFIRMS RATINGS OF TOBACCO COMPANIES; OUTLOOKS UNCHANGED
Moody's Investors Service confirmed the ratings of four major tobacco companies competing in the U.S. market, following the recent decision of the Third District Court of Appeals of Florida in the Engle case. Moody's also confirmed the stable outlooks of these companies. The confirmations and stable rating outlooks reflect Moody's view that while the current phase of the Engle trial could result in the determination of a potentially considerable award, the tobacco companies will be able to appeal the decision to higher courts. Moody's also noted that the possibility that tobacco companies would have to post a bond for any large punitive award while pursuing these appeals is remote.
At the end of Phase I of the Florida Engle case, a jury found that the tobacco industry had been intentionally deceitful about the dangerous effects of smoking. The jury's findings were not subject to appeal because no damages were awarded. According to the trial plan defined by the judge presiding over the proceedings, in Phase II - which is slated to start on November 1, 1999 - the same jury will be looking at whether compensation should be paid for individual members of the class of Florida smokers. In addition, the jury will be looking at whether punitive damages should be awarded to the entire class. This determination will be made as soon as one or more of nine individual sample cases is found in favor of the plaintiffs. The industry filed a motion to have damages determined only on the basis of individual hearings. Last week, the Appeals Court denied the motion (without prejudice to the right to a future appeal), which means that Phase II will proceed as defined by the judge.
Moody's believes that Phase II is likely to result in at least one case being found in favor of the plaintiffs, based on outcomes of similar individual trials in the past. Moody's also believes that the punitive damages award that will then be determined for the entire class could be extremely large, possibly in the hundreds of billions of dollars, based on an estimate of the class size and of average punitive damages awarded to individuals in past cases. However, it is highly unlikely that tobacco companies will be asked to pay this amount immediately, based on the court's own trial plan. This plan provides that in Phase III separate individual trials would take place to determine who belongs to the class. At the end of Phase III, the award would be shared equally among all members of the class. The completion of Phase III could take decades, based on the number of potential participants to the class. Until Phase III is completed, payment of the award is likely to be found impossible, since the identity of all class members and the amount that each should receive will remain unknown for a long period of time.
Additionally, Moody's believes that tobacco companies are likely to appeal class certification following any adverse verdict resulting from Phase II. While an award would represent a contingent liability that is likely to be large, the chances that such an appeal would ultimately be successful are strong, based on the many state and federal court precedents decertifying tobacco class action proceedings. This significantly diminishes the likelihood that tobacco companies will seek settlement at that time.
Moody's believes that it is unlikely that the tobacco companies would be required to post a bond in order to appeal an award for punitive damages for the entire class. This is an important consideration underlying Moody's confirmation of the tobacco companies' ratings and stable rating outlooks. The posting of a bond, potentially of the same amount as the punitive damage award, would probably be impossible, because no bond providers would likely be found. Such a situation could force the tobacco companies to settle, with potentially damaging consequences to the tobacco companies' creditworthiness. However, Moody's believes that the possibility that tobacco companies would ultimately be forced to post a bond is very remote for two reasons. First, the tobacco companies would have a very strong argument that since neither the individual amounts nor the identity of the beneficiaries would be known, there would be no final judgment to execute regarding punitive damages, and therefore no final judgment to stay by posting a bond. Second, if the companies were ordered to post a bond, the companies could appeal this requirement. This appeal could be taken to the highest federal courts, if the companies found it necessary. The chances that a requirement to post a bond would be overturned on appeal would be high. During the time that the tobacco companies would pursue these appeals, they would not have to post a bond.
Moody's has carefully reviewed the indentures and bank agreements of the companies. Reflecting the fact that any adverse court decision 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 decision of Florida's Third District Court of Appeals:
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 and Prime-3 rating for commercial paper
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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