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High Court OKs 'Light' Cigarette Suits

WASHINGTON - The Supreme Court yesterday removed a legal barrier to tobacco lawsuits filed over the allegedly deceptive marketing of "light" cigarettes, allowing for suits based on certain state deceptive practice laws to move forward.

The 5-4 ruling by the justices, who sided with a group of Maine residents over Altria Group Inc., the parent company of Philip Morris USA Inc., could negatively affect credit ratings for tobacco bonds, if lower courts force tobacco companies to pay damages in lawsuits.

The Supreme Court ruling could further weaken the tobacco bond sector at a time when forced selling of the debt by high-yield funds has made pricing difficult, said Matt Fabian, managing director of Municipal Market Advisors.

"The sector is already under fire, and there have been dramatic losses since the peaks a few years ago," he said. Because tobacco bonds are being sold to investors less familiar with tobacco litigation, the ruling "may also slow down any potential recovery" in the sector, he said.

The case, Altria v. Good, came before the court in October, when states had issued a total of $55.3 billion tobacco debt between 1999 and 2008 that securitized annual payments from tobacco companies under the Master Settlement Agreement. Last year's $16.9 billion of tobacco bond sales was the largest annual volume since the bonds were first sold in 1999.

Stephanie Good and other Maine residents - who for at least 15 years smoked light cigarettes or cigarettes advertised as low-nicotine or low-tar - filed the original lawsuit against Altria in a federal court in Maine. The smokers claimed that describing the brands as light or low-tar or low-nicotine was fraudulently misleading because the cigarettes were as hazardous to smokers' health as regular cigarettes.

The court in Maine decided in favor of Altria. Good, and the other Maine residents appealed in August 2007 to the U.S. Court of Appeals for the First Circuit in Boston, which reversed the lower court's ruling.

Altria appealed to the Supreme Court, arguing that federal law preempts states' deceptive marketing laws.

Siding with the Maine residents, Justice John Paul Stevens wrote the majority opinion and was joined by Justices Anthony Kennedy, David Souter, Ruth Bader Ginsburg, and Stephen Breyer. Justice Clarence Thomas wrote the dissenting opinion, joined by Chief Justice John Roberts and Justices Antonin Scalia and Samuel Alito.

The decision means that lawsuits based on state laws can move forward in federal courts and are not preempted by the Federal Cigarette Labeling and Advertising Act that followed the surgeon general's conclusion that cigarette smoking is a health hazard.

However, the court's decision does not mean the Maine residents' original lawsuit or similar lawsuits being considered at the state level against tobacco manufacturers will ultimately prevail, even though lawyers for both sides did argue health-related and cigarette-pricing aspects of the case before the justices.

The labeling act says state laws can impose no requirement or prohibition based on smoking and health, "with respect to the advertising or promotion of any cigarette the packages of which are labeled in conformity with" the act's provisions.

The court's opinion could be significant for the municipal market because tobacco manufacturers signed the Master Settlement Agreement with 46 states and six territories in 1998, agreeing to pay billions of dollars to them over a 25-year period, and muni issuers have sold tobacco bonds securitized by those annual payments.

The first debt - $709 million of tobacco bonds- was sold by New York City's TSASC Inc. in 1999.

In 2003, an Illinois judge ordered Altria to pay $10.1 billion in damages in a class action suit over light cigarettes. Tobacco bond credit downgrades followed soon after the decision.

Tobacco bond issuance slowed to a halt in 2004 because of litigation against cigarette companies. The companies withheld $755 million of annual settlement payments in 2006 during disputes over prior-year payment adjustments. They withheld another $696 million during a dispute over annual payments in 2004, which they said were unfairly inflated. The bonds regained strength in the market by the first quarter of 2007, representing 7.7% of all munis sold during the quarter.

Standard & Poor's put 11 tobacco bond ratings on negative watch in April due partly to assumptions on the participating manufacturers' relative market shares. Less cash would be available to service the bonds whose ratings were placed on watch, the agency said.

But a Merrill Lynch & Co. report last week projected a relatively steady long-term future for tobacco bonds.

Tobacco settlement bonds are not pressured by the economic influences affecting most tax-exempt debt, the report said. While consumption rates fell more sharply this year, the long-term rate of annual decline should stay true to projections of 1.82%, the report said.

The volume of tobacco settlement transactions in 2008 was lower than Merrill expected. However, more first-time issuers should enter the market in 2009 when states that feared settlement pledges would be invalidated by court rulings "reconsider their prior positions," according to the report. Merrill said states have "defensible" positions in tobacco settlement lawsuits.

"The prospective proceeds from tobacco settlement asset securitizations would fulfill a more urgent fiscal concern, even as a one-time solution, for plugging rapidly increasing deficiencies from traditional state revenue sources," the report said.

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