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Derivatives

Altria Spreads Blow Out As Litigation Woes Multiply

Five-year credit protection on tobacco giant Altria widened last week after news that the firm's subsidiary Philip Morris USA must face class-action lawsuits brought in Missouri hit the market.

Five-year credit protection on tobacco giant Altria widened last week after news that the firm's subsidiary Philip Morris USA must face class-action lawsuits brought in Missouri hit the market. In the state, smokers have complained of being misled about the health risks of so-called light cigarettes. The case follows a similar action in Illinois in which the corporate was required to post USD12 billion against the verdict.

Default swaps on Altria widened to 149 basis points last Tuesday, before coming back to around 140bps the next day, said a trader. Protection was trading at 130bps before the news, he added. Spreads came back in soon after the initial blow out because proprietary desks and hedge funds sold protection, or bought bonds in the cash market expecting the spreads to revert in the long run because they consider Altria to be undervalued.

Moody's Investors Service rates Altria Baa2 and has it on negative outlook. Christophe Razaire , senior credit officer in New York, said the negative outlook on the firm is tied to several factors including the fact that the dynamics of the U.S. market continue to make it difficult for established players to compete against deep discounters. Litigation against tobacco firms also remains an issue, although the acceptance by more states of legislation designed to contain and lower the market share of deep discounters counts as a plus for Altria, he noted. Razaire said he was still evaluating what potential impact the cases in Missouri may have on the corporate.

 

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