Altria Slides on Slew of Bad News

In 1998, tobacco companies agreed to pay states $246 billion over 25 years for Medicaid costs that had been brought about by smoking relating illnesses. Illinois is expected to receive $9.1 billion from the Master Settlement Agreement through 2025. Given that most state budgets are in poor condition and deficits are spiraling out of control, these tobacco payments are crucial.

"In essence, this move by Philip Morris USA [to withhold state fees] results in the individual states lobbying to protect their Master Settlement Agreement payments," Feldman said. "This pressure naturally has the knock-on effect of aiding Philip Morris USA on the bonding issue."

Feldman said that while the states have no formal standing to file a motion or intervene, their actions will heighten the profile of the case on both a political and legal basis. Still, he said there is no guarantee of the outcome and that earnings could be affected if Philip Morris USA posts a nonrefundable bond or if the ratings agencies decide to cut their ratings.

David Kathman, an analyst a Morningstar, said he still believes the company will "work something out." He added, "Very few people would benefit at all, and a lot of people would be hurt if they were forced into bankruptcy. I don't know what the chances are of them going into bankruptcy, but a lot of people don't want to see that happen and that includes the state of Illinois."

Some legal experts say it's possible that the bond could be reduced. Robert Zeavin, managing partner at Steefel, Levitt Weiss, said Philip Morris will argue that it shouldn't have to post the $12 billion bond to ensure that it can pay damages, because it has enough assets to cover the damages if the case is upheld on appeal. He also said the firm will contend that it shouldn't be denied appeal rights simply because it is unable to post the $12 billion bond immediately. "For me at least, those are two pretty compelling arguments," he said.

But Clark Kelso, a professor of law at the University of Pacific McGeorge School of Law, said the law is ambiguous. "It isn't clear whether the fact that a bond may bankrupt a company would be enough in itself for Philip Morris to be granted relief," he said. "I think it does present a significant risk for Philip Morris."