More on our "lawyer" culture, and a warning, it will make you want to puke>
Lawyers in Tobacco Settlement Turn to Bonds for
Fees
New York, Nov. 22 (Bloomberg) -- Lawyers who took on the tobacco industry on
behalf of states from Florida to Massachussetts two years ago, are anxious to be
paid.
Rather than waiting as long as 25 years to collect the $9.5 billion in fees
generated from settlements, some lawyers are turning to the bond market. They
plan to sell securities backed by future payments that would let them pocket
some of the money immediately.
``They can get cash upfront instead of having it trickle in over 25 years,'' said
Jonathan Prestley, a vice president at Hartford Investment Management Co.,
which handles $5.8 billion in asset-backed securities.
Investors who buy such bonds would collect interest payments from the money
received from the four tobacco companies involved in the $206 billion settlement:
R.J. Reynolds Tobacco Co., Philip Morris Cos., Brown & Williamson Tobacco
and Lorillard Inc.
While the bonds may offer higher yields, investors will shoulder the risk of default
by the tobacco companies, which are facing private lawsuits and the threat of
other big judgments.
By selling bonds, the lawyers would imitate some of their clients. Alabama and
Alaska, New York City and several New York counties already have sold more
than $2 billion of municipal bonds backed by their future share of tobacco
settlements. Though sold by local governments, the bonds are supported only by
settlement payments and have no general pledge of the governments.
Brainstorm
No sooner had the lawyers won the case for their clients --46 states, five
territories and the District of Columbia -- than they began to think about how to
get paid faster. Ron Borod, an attorney at Brown, Rudnick, Freed & Gesmer in
Boston, helped organize a group of lawyers to pursue the plan with Wall Street
securities firms.
Morgan Stanley Dean Witter & Co. was chosen to underwrite the bonds. A
disagreement over the terms prompted the lawyers to switch to Credit Suisse
First Boston, which had also been in the running to underwrite the bonds. Last
March, the Credit Suisse bankers working on the project defected to Deutsche
Bank, and took the deal with them.
The firm, meeting with investors to explain tobacco fee bonds, expects to set
prices as early as next week. It isn't clear yet which law firms are participating in
the offering, and Deutsche Bank officials declined to comment on the sale.
Lawyers who represented Mississippi, Florida, Texas, Massachusetts and 10
other states and Puerto Rico have determined fees with an arbitration panel, a
total of about $11.5 billion. They will repackage some of the $9.5 billion still due
to be paid, which could take 25 years to collect because of the $500 million
annual limit on payments determined through arbitration. Lawyers may also opt
to negotiate payments directly with states.
Asset-Backed Model
The model for the lawyer-fee bonds comes from the $882 billion asset-backed
market, in which banks and finance companies repackage pools of debts owed
to them, such as credit-card accounts, auto loans and home-equity loans, into
bonds. By selling asset backeds, banks and finance companies get cash
upfront, passing on future payments to bond investors, who also accept any risk
of loan defaults.
Other investment banks plan to get in on the lawyer-fee bond action. UBS
Warburg LLC, the division of Switzerland's UBS AG, is working with attorneys
and credit-rating services to assemble a similar sale early next year, said Paul
Jennison, an executive director at USB Warburg.
The Swiss parent, which recently purchased the U.S. brokerage company
PaineWebber Inc., hopes for a double benefit. First, UBS Warburg will manage
the bond sale for an underwriting fee, then PaineWebber will seek to manage the
lawyers' proceeds through its national network of brokers.
``It's a natural extension of all our work in municipal issuance'' of such bonds,
Jennison said. PaineWebber was a co- manager for New York City's tobacco
bonds.
Credit Risk
The question for investors is whether tobacco companies can boost profits to pay
what could be a running legal tab, as cigarette consumption in the U.S. is
declining. The companies' payments to the states' lawyers are on top of the $206
billion settlement. They earlier reached a separate $40 billion settlement with four
other states.
While most asset-backed bonds get ``triple-A'' ratings because they are backed
by large, diverse sources of cash flow -- pools of consumer debt accounts --
bonds backed by legal fees come from only the four cigarette companies. That
makes the lawyer-fee bonds more akin to unsecured corporate debt.
``Our ratings on these bonds will be tied to the ratings of the domestic (tobacco)
industry,'' which is `single A' for unsecured basis,'' said James Grady, a director
in the asset- backed group at Fitch Inc.
Tobacco companies' troubles are far from over, as they face lawsuits from
individuals, unions, insurance companies and the federal government. Earlier this
month, a Florida state judge upheld a record $145 billion verdict against Philip
Morris and other U.S. cigarette makers in a class-action lawsuit brought by
smokers and families of dead smokers. The companies are appealing the verdict.
Investors, who are used to dissecting stable cash flows from mortgages and
consumer loans, will have to apply their models to a new area. ``It's an unusual
risk to analyze because you're dealing with legal events'' that are hard to predict,
said Prestley of Hartford Management.
Small Market
Prestley said he won't commit to buying any of the bonds yet. He expects
legal-fee bonds to be limited to private sales, making them less liquid, or harder
to resell.
``It's not going to be a huge market,'' he said. ``We will wait and see how the
market shapes up.''
Prestley said that his firm also passed up buying municipal tobacco-settlment
bonds because they didn't pay enough yield.
New York City's $709 million of tobacco bonds featured 10- year securities priced
to yield 5.75 percent, or 67 basis points more than ``triple A''-rated general
obligation bonds. |
