Bond Issue Planned for Tobacco
Fees
Daniel Wise
A group of 15 plaintiffs' attorneys for states
involved in the nationwide tobacco settlement are
exploring floating a bond issue that would enable them to receive
billions of dollars
immediately rather than waiting 16 years or longer to receive the
full amount of their fees.
The group has asked about 10 New
York-based investment banking firms to submit proposals
for the issuance of bonds that would be backed by the
income stream generated by the fee
awards, confirmed Robert Lieff, one of the
lawyers involved in the effort.
Legal experts said yesterday that they had
never heard of the use of bonds to telescope the
payment of lawyers' fees. Charles Wolfram, an ethics professor at
use of such an approach is "absolutely unprecedented."
Although no one has definitely committed to
the idea of securitizing the fee payments, there is
"wide interest" among plaintiffs' tobacco lawyers in the
approach, said Mr. Lieff, of Lieff,
Cabraser, Heimann
& Bernstein in
About 10 of the 15 lawyers actively pursuing
the bond approach were involved in the three
states -- Mississippi, Texas and Florida -- that
settled before last November's historic $206
billion settlement with 46 states and five territories.
The settlement represented reimbursement
to the states for the costs of treating Medicaid
patients for smoking-related illnesses. The 30
law firms that represented those three states were
collectively awarded $8.2 billion in fees in
an arbitration that was concluded in December.
Lawyers from many other states that have yet
to go to arbitration are also interested in the
securitization approach, and the total amount floated as a bond
issue could swell to more than
double the $8.2 million awarded to date.
The next state set to go to arbitration
is
could receive arbitrated awards within the next year, said Mr. Lieff, whose firm expects to be
involved in arbitrations in
are involved in the bond effort because the tobacco litigation here
remains mired in an appeal.
At issue in the appeal, to be heard in the Appellate Division,
is contending it was shortchanged by $2.3 billion in the projected
distribution of
state's $25 billion share of the settlement.
Under the November accord, law firms cannot
arbitrate their claims until the settlement has been
finalized in their states.
Two of the firms that have spearheaded
the litigation nationwide have been active in exploring
the bond approach: Ness Motley Loadholt
Richardson & Poole, whose main office is in
Joseph Rice, of Ness Motley, said that after
the April 27 deadline for the investment banks to
submit their proposals, the firms will "consider whether it is
in our best interest to securtitize
any or all of the attorneys fee awards."
Not until specific proposals are submitted will
the lawyers know how steep a discount the
banks will demand to allow the attorneys to receive their
fee awards up front, Mr. Lieff said.
ADVANTAGES LISTED In addition to
accelerated payment, the bond issue would also
permit the attorneys to avoid the risk that any of the four tobacco
companies signing the
agreement might file a bankruptcy petition and become unable to
honor the fee commitments.
The four signatories are Phillip Morris, Lorillard
Tobacco, Brown & Williamson and R.J.
Reynolds.
The use of bonds also offers a tax
advantage. Since the fee payments from the tobacco
companies will be used to pay off the bonds, instead of compensating
the attorneys directly,
they will not be taxed entirely as income. Instead, in the early
years, nearly all of the payments
will be allocated to interest, rather than principal,
and not subject to income tax, Mr. Lieff
explained.
Under the terms of the settlement, fee payments in any one year by the four tobacco
companies
is capped at $500 million. With $8.2 billion in
fees already committed, it will take the
companies at least 16 years to pay off their current
obligation. Ultimately, it is considered
likely that the total amount of fees approved by the arbitration
panel will exceed $15 billion,
leading to a payout period of 30 years or more.
Within the next month, Mr. Lieff
said, interested firms will set up a governance process for
deciding whether to go ahead with a bond issue, and if
so, choose the banks that will handle it.
Proposals have been solicited from at least
10 banks: Bear Sterns, Credit Suisse First Boston,
Goldman Sachs, Lazard Freres,
Lehman Brothers, Merrill Lynch, Morgan Stanley,
PaineWebber, Salomon Smith Barney and Warburg Dillon Read.
Because the total amount of fees that will
be allocated to a bond issue is uncertain, Mr. Lieff
said, the banks were asked to make proposals for funding at various
set levels so that their
approaches could be measured against each other.
Though the approach is novel, Professor
Steven Gillers, who teaches ethics at New
York
University School of Law, said he could see no legal
problems with it. "I don't see why [the
legal fees] aren't a piece of property that can't be
syndicated like any other piece of property."
See related article
Cashing in on Tobacco
N.Y.'s experiment with
municipal securitization piquing interest
Torri
Still The Recorder/Cal
Law
Cities and counties across the country are
eyeing
securitizing its share of the $206 billion nationwide
tobacco settlement as a potential model for
their own settlement proceeds.
The $625 million in bonds
tobacco money it otherwise would be receiving over the
next 25 years. Securitizing the money
-- borrowing against future cash flows -- allows the city to
use the proceeds much sooner.
The move is being watched closely by
other municipalities -- some of which are already
securitizing other revenue sources to raise cash. And to the
handful of law firms that specialize
in the complex deals, the increase in municipal
securitization is proving a boon.
to handle its deal. Brown & Wood and Orrick, Herrington
& Sutcliffe will serve as
transactional counsel and underwriters' counsel, respectively.
In
$539 million their city will receive over the next 25 years as part
of the tobacco settlement.
"Tobacco money is such a new product for
the bond market that it's too risky for us to make
the decision to securitize at this point," Deputy
City Attorney Marc Slavin said.
"We're very interested in what happens with
only factor in our decision. The primary consideration
is minimizing the taxpayer burden."
Honda Hospital. Now, tobacco money will cover only a
portion of it, the city announced
Tuesday. Instead, a $437 million bond measure to cover
the remainder will be put to voters in
November.
In the meantime, city officials will ponder
municipal securitization, which is an offshoot of a
technique long used by corporations to finance
mortgages and credit card receivables: selling
the revenue streams to entities that assume the risk of
the potential bankruptcy of the revenue
source.
The technique enables corporations to attain
a higher credit rating and lower their interest costs
-- not to mention avail themselves now of future
revenue.
Securitizing tobacco settlements is appealing
for municipalities that want to avoid the 25-year
wait to collect all of their money. Securitization also
mitigates the risk that, over the course of
25 years, tobacco companies might go bankrupt and be
unable to pay up.
On the other hand, the fact that
municipalities often have better bond ratings than tobacco
companies may discourage them from issuing bonds backed by tobacco
settlement money,
which would entail higher interest payments.
"It becomes a question of what revenues the
city or county needs," San Francisco-based
partner Eric Tashman, head of Brown &
Wood's West Coast finance group, explained. "Many
states will elect not to securitize and instead use the
money coming in on an annual basis."
Orrick and New York-based Brown & Wood
are among the few law firms that handle
municipal securitization.
"We're one of the few firms in the country that
has municipal and corporate finance expertise,
plus expertise in securitization and tax law," Tashman said. "You need an assortment of
skills
under one roof."
Roger Davis, firmwide head
of Orrick's public finance department, agrees.
"We're two major bond firms which
coincidentally have both public finance and structured
finance departments," he said.
As
securitizing tobacco revenue, they are
busy working on other municipal securitization deals.
The practice of securitizing tax liens, i.e., selling rights to the
penalties accrued on delinquent
property tax payments, is a technique on the
rise among
Orrick's
counties on delinquent tax lien deals.
Brown & Wood has handled all of
issued to help utilities pay for costs that, following
deregulation, were unrecoverable. "Our
stranded cost efforts have largely been based [in]
financing was done here," Tashman
explained. "We've since expanded to other states."
While the concept of municipal securitization
is "relatively new,"
have just scratched the surface. There is a lot they
can do in structuring their revenue and debt
operations by borrowing this securitization concept and
securitizing various revenue streams."