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Tobacco bill draws fire
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April 2, 1998: 6:02 p.m. ET
Cigarette makers face sharply lower credit ratings if Senate bill is enacted
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NEW YORK (CNNfn) - The tobacco industry was surrounded by smoke Thursday after a leading cigarette maker denied it was planning to withdraw from a proposed national settlement agreement and a major ratings agency said the credit worthiness of the world's top tobacco companies would take a sharp hit if the compromise tobacco bill becomes law.
Separately, Supreme Court Justice Clarence Thomas refused Thursday to spare the nation's cigarette makers from having to release 39,000 secret documents in a closely watched Minnesota trial.
However, Thomas' gave the industry until 5 p.m. Monday to seek help from any of the Supreme Court's eight other members by resubmitting their claims that "tens of thousands" of the documents are privileged information that should stay secret.
R.J. Reynolds Tobacco Co., which makes the popular Camel brand of cigarettes, denied published reports that the company was planning to withdraw from the proposed national settlement agreement signed on June 20, 1997.
Earlier, the Associated Press quoted an anti tobacco attorney, John Coale, as saying the company would pull out of the proposed settlement. However, the purported move was later described as something that was "run up the flag pole."
A spokesman for the company denied it was withdrawing from the settlement but the company said the bill supported by Sen. John McCain (R-Ariz.) does not reflect the same goals as the June pact.
On Wednesday, the Senate Commerce Committee, in a 19 to 1 vote, approved legislation that would raise the price of cigarettes and significantly limit the tobacco industry's protection from liability in future lawsuits.
The proposed bill would nearly double the obligations of the tobacco industry from the $368.5 billion negotiated by the industry and 39 state attorneys general in the June 1997 comprehensive settlement.
It also would force up the price of cigarettes $1.10 a pack over 5 years, and impose penalties of up to $3.5 billion a year on tobacco companies for failure to reduce the number of teenage smokers to specified levels.
The bill increases the cap on liability payments in any given year to $6.5 billion from $2 billion. But the protections are forfeited if the companies fail to achieve the specified reductions in teenage smoking.
McCain, speaking on CNNfn, said he was still hopeful the government could reach an agreement that would be acceptable to both sides.
"If the tobacco companies cannot handle this settlement, then obviously the Administration and all of us working together may have to revisit, but we'll rely on frankly, Wall Street analysts and other who will give us the benefit of their knowledge as to whether the tobacco companies can handle this or not," he said.
Earlier, a leading ratings agency said the biggest loser could be RJR Nabisco Holdings Corp., the nation's second-largest cigarette maker after Philip Morris.
RJR Nabisco's available net cash flow of about $800 million may not be adequate to cover its portion of the more than $500 billion in industry payments over 25 years required by the bill, according to Fitch IBCA.
The agency has given RJR Nabisco a `BBB' rating.
Because the allocation of future payments remains unknown, Fitch could not state with certainty the bill's precise impact on credit quality. But it would presumably hit hardest those companies, like RJR Nabisco, whose holdings are concentrated in the United States and which might expect to bear a heavier obligation burden than smaller companies.
For instance, Fitch said the impact of the bill on the credit quality of British-based B.A.T. Industries will depend largely on whether the litigation facing the tobacco industry in the United States is passed overseas. B.A.T. has an 'A' credit rating. Yet only 30 percent of its operations are based in the U.S. The remainder of its revenues are generated in more than 180 countries.
B.A.T.'s net free cash flow in 1996 was about $1.25 billion, Fitch said.
Diversification may also provide a buffer for tobacco companies. Take Loews Corp., which is rated 'AA', and whose Lorillard subsidiary, according to Fitch, accounts for only 12 percent of Loews' consolidated 1997 revenues and 30 percent of its operating income.
Uphill battle looms in Congress
Ultimately, however, the speculation about lowered credit ratings may be premature. Though the tobacco bill received broad bipartisan support in the Commerce Committee, it clearly faces an uphill battle in winning broader Congressional consent.
McCain told CNNfn he had no illusions about the political horsetrading that lies ahead in winning final passage.
"I think it's going to be one of the biggest food fights on the floor of the Senate you've ever seen, unless we can come to some agreement ahead of time, because everybody's got their program," McCain said.
McCain said the financial health of the tobacco companies could not be his top priority.
"Our job, in all due respect, is not to satisfy Wall Street," he said. "It's to try to satisfy the families of America that we're doing everything we can to stop kids from beginning to smoke."
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