Updated from 10:17 a.m. EST
Investors sent shares of
sharply lower Monday amid news of more woes for the company.
The first blow came when Standard & Poor's warned Friday that it could cut the firm's debt rating to junk status if the company has to shell out for a $12 billion bond to appeal the verdict in a recent trial in Illinois. Then, Moody's Investors Service on Monday cut its rating on Altria by two notches. Also, Monday marked the second day of New York's smoking ban in restaurants and bars, adding to investor nervousness.
The company's shares ended down almost 7% at $29.96 amid the barrage of bad news. R.J. Reynolds, meanwhile, shed 5% to $32.26, and
( LTR) Lorillard Tobacco, which trades as the tracking stock
, lost 3% to $18.50.
Altria was ordered March 21 to pay more than $10 billion for deceiving smokers into thinking that low-tar cigarettes were less harmful than regular brands. In order to appeal the case, the firm must pay a bond of $12 billion -- the amount of the award plus interest. An appeals bond is designed to assure that the plaintiff who has won a verdict will get paid if the appeal fails. The Illinois Court has stayed the entry for its judgment until April 21, and Altria is trying to reduce the cost of the bond by negotiating with the defendants. Formal discussions between the two parties are scheduled to start Tuesday.
In a note Friday, Standard & Poor's credit analyst Nicole Detz Lynch said she would cut the firm's debt rating to "speculative-grade" prior to April 21 "if there is not a viable and realistic plan to address the bonding issue." If the amount of the bond can't be reduced to a manageable amount, she said, Philip Morris USA "might have to consider bankruptcy as an option."
Meanwhile, Moody's cut its rating on Altria, citing the company's potential inability to pay the bond. Its rating is now three notches above junk status.
Nonetheless, some equity analysts believe that Altria might be successful in lowering the bond payment. "I think it's highly likely that the bond amount will be reduced, given what happened in the Engle case," said an analyst who requested anonymity. The analyst said the bond could be reduced to as little as $100 million.
In the Engle class-action lawsuit, a Florida jury ordered the tobacco industry to pay sick smokers $145 billion in punitive damages, but the plaintiffs shelled out just $600 million to appeal the case. The circumstances in that situation were slightly different, though, because Florida Governor Jeb Bush had signed a bond-cap legislation into law some 10 weeks before the Engle jury determined its punitive damage award. Philip Morris paid that $100 million bond and then made a nonrefundable $500 million payment in return for class representative Stanley Rosenblatt's agreeing not to appeal the constitutionality of the $100 million bond cap.
Still, Martin Feldman, an analyst at Merrill Lynch, said a smaller yet nonrefundable payment remains an option. He also said it is also possible that Philip Morris USA will file a successful appeal to the Supreme Court or that bonding-cap legislation will be passed and retroactively applied, although he noted that this last option is somewhat questionable.
Analysts also note that the tobacco industry has a powerful lobbying force behind it. Some 49 states -- all but Illinois where the case is being tried -- have indicated that if the issue isn't resolved by April 15, they will intervene to seek a smaller bonding requirement. The states are concerned because Altria has said it wouldn't be able to pay the $2.6 billion it owes the states next month if the bond were upheld.
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."