Tobacco bondholders received positive news from the courtroom and Standard & Poor’s.
In a significant step toward reinforcing the Master Settlement Agreement, a federal judge in New York dismissed the Freedom Holdings Case, which had been winding its way through the courts since 2002.
Freedom Holdings challenged legislation in New York that was necessary to implement the Master Settlement Agreement (MSA) between cigarette manufacturers and the 46 participating states and territories.
Plaintiffs in the case included small cigarette manufacturers who weren’t part of the agreement. These non-participating cigarette manufacturers (NPMs) argued that the legislation created a cartel comprised of the states and tobacco companies.
The suit claimed the cartel guaranteed market share and freedom from litigation for participating manufacturers in return for the payments received each year by the states, which are based on cigarette shipment levels. As a result, the plaintiffs contended, the NPMs were at a disadvantage and the “cartel” was an illegal restraint on commerce. Freedom Holdings had been viewed as the most serious litigation threat to the MSA.
In rejecting the plaintiffs’ case, the judge in New York said the MSA has well served New York State’s public policy intention to reduce smoking. Furthermore, the judge noted, since the enactment of the MSA, the number of major manufacturers has dropped from five to three, and the market share of the original five major tobacco companies has dropped from 97%to 85%.
As a result of the shrinking share of the majors, smaller firms have taken up the slack and actually prospered as a result of the MSA, thus undercutting the NPMs’ argument.
S&P: Bonds unaffected by downgrade
The other item of interest to tobacco bondholders was Standard & Poor’s statement that tobacco settlement bond ratings were unaffected by S&P’s recent downgrade of Altria, parent company of Philip Morris.
Altria was recently downgraded to “BBB” from “BBB+,” primarily reflecting its increased debt profile resulting from the acquisition of U.S. Tobacco.
Although lowering Altria’s rating, S&P noted the company’s strong ability to generate free cash flow and its industry leading 50% market share. Altria’s rating now has a stable outlook.
As the cigarette industry’s market leader, Altria annually pays roughly half of the payments to the states mandated by the MSA.