US CREDIT-Court ruling could propel Altria to further gains

By Karen Brettell

NEW YORK, June 30 (BestGrowthStock) – Bonds of tobacco giant Altria
Group (MO.N: ) may continue to improve after a U.S. court
decision removed the threat that the industry would need to
make large financial payouts from cigarette profits.

The U.S. Supreme Court on Monday rejected an attempt by the
federal government to wrest billions of dollars in damages to
fund a smoking cessation program and other remedies.

The decision settled a case filed in 1999 by the Clinton
administration, which sought to force the industry to fund a
smoking cessation program and other remedies. The U.S. Justice
Department under the Bush administration dropped demands from
$280 billion to $14 billion. For details, see [ID:nN28172572]

“This was the biggest legal threat on the tobacco
industry’s horizon because of the possibility that a
disgorgement penalty could be revived,” said Mark McMinimy,
analyst at Concept Capital’s Washington Research Group. “That
would have introduced a large measure of uncertainty back into
the equation for the cigarette companies that are involved in
this litigation.”

Bonds of Altria, which owns the largest U.S. tobacco
company, Philip Morris USA, rallied on the news. Spreads on
Altria’s 9.25 percent bond due 2019 tightened 68 basis points
to 272 basis points over comparable Treasuries, according to
MarketAxess.

The cost to insure Altria’s debt with credit default swaps
fell to 179 basis points, or $179,000 per year to insure $10
million in debt for five years, from 221 basis points before
the decision, according to Markit Intraday.

Reynolds American’s (RAI.N: ) 7.625 percent bonds due 2016
rallied 51 basis points to 312 basis points over Treasuries and
its CDS fell 39 basis points to 193 basis points.

“Its certainly a favorable decision for the industry
because it removes a cloud of uncertainty that could have been
a big monetary number,” said Craig Hutson, analyst at credit
research firm Gimme Credit.

Hutson has an outperform on Altria’s debt, saying the debt
typically does better than average when the market improves
overall. “Fundamentally there haven’t really been a lot of
surprises in recent quarters, they still generate large amounts
of cash flows,” he added.

Analysts at JPMorgan also see room for further improvement
in the debt.

“We think there is more upside potential to the trading
levels and expect bond spreads to continue to grind tighter as
the news settles in,” analysts Virginia Chambless and James
Stone said in a report.

The bank estimates fair value for Altria and Reynolds debt
at around 240-to-250 basis points over Treasuries for 10-year
bonds, and said Altria’s 30-year debt should trade around
275-to-285 basis points over Treasuries.

While the Supreme Court decision removes much uncertainty
relating to tobacco companies, other litigation risks remain
while the US Food and Drug Administration also has extensive
power over the products of cigarette makers.

Standard & Poor’s said on Monday that the decision would
not result in ratings changes for Altria or Reynolds.

“The ruling removes the threat of a substantial adverse
financial impact that could have resulted from the utilization
of financial disgorgement as a potential remedy against the
manufacturers,” S&P said in a statement.

However, “we continue to monitor the ongoing litigation and
regulatory environment, which remains a risk factor to the
rated domestic tobacco manufacturers,” S&P added.

Concept Capital’s McMinimy said the biggest risk to tobacco
companies now is that the FDA could seek to change ingredients
such as menthol in cigarettes, or even alter nicotine levels.

“The FDA can fundamentally alter the nature of the products
the industry is offering, in ways that litigation could not
do,” he said. “I think they are likely to proceed with that in
a very measured fashion, but its essentially out of the
industry’s hands.”

Investing Analysis

US CREDIT-Court ruling could propel Altria to further gains