S&P Says It May Have Rated Rhode Island’s Tobacco Bonds Too High

Standard & Poor’s said it may have been too optimistic in its ratings on a $330 million bond deal that was backed by tobacco lawsuit settlement payments owed to the state of Rhode Island.

The bonds, which were issued in March by the state’s Tobacco Settlement Financing Corp., may have deserved lower grades if the ratings firm had taken into account potential losses in bonds that S&P didn’t rate, the firm said in a statement Thursday. The securities were rated as high as A.

“Our analysis did not consider certain provisions of the transaction documents,” S&P said in the statement, explaining that some payment priorities could change under certain events of default. Those factors were not taken into account, and “as a result, the ratings on any affected bonds would have been lower,” the statement said.

The groups involved in the transaction are discussing a possible “action plan” to prevent the bonds’ grades from falling, the bond grader said.

April Kabahar, a spokeswoman for S&P, which is owned by McGraw-Hill Financial Inc., declined to comment.

A statement on behalf of Rhode Island will be posted on the Electronic Municipal Market Access website Thursday afternoon, Thomas Mullaney, executive director of the state’s Budget Office, said by e-mail.

The tobacco Master Settlement Agreement was agreed to in 1998 between 46 U.S. states and major tobacco manufacturers, including units of Philip Morris International Inc., Reynolds American Inc., and Lorillard Inc. Those companies agreed to pay out more than $200 billion over 25 years to participating states, according to the original terms of the agreement.

California, Louisiana, Washington, South Dakota and Minnesota also have used settlement payouts as a source of bond collateral in recent years.

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