Even as Altria Group's credit spreads were pounded this week on revived worries about multibillion dollar litigation, analysts and traders were far from unified in viewing the latest weakness as an opportunity.
The list of potential legal risks to Altria is long, and comes on top of the revived $145 billion Florida Engle suit, in which the state supreme court is reviewing a dismissal by an appeals court.
While that decision threw a new question mark over possible litigation, some traders and analysts said other crucial legal decisions would come later in the year: a claim ruling before the expected start of a case brought by the Justice Department, and an expected ruling of the Illinois Supreme Court on the $10.1 billion judgment against Philip Morris.
As Fitch Ratings said, the Engle case hearings are not until October and a decision may not come until next year, even before a likely appeal to the US Supreme Court. The federal case is set to begin in September and could drag into 2005 as well.
For that reason some credit traders said on Friday the damage to Altria Group's credit spreads had likely run its course in this week's volatile trade and would stabilise.
"We're probably away from more headline risk," said one senior credit default swaps trader.
But others were not so sure. Some analysts believe a hearing on the Justice Department's case involving "disgorgement" of the $289 billion suit - whether the government can go for that entire enormous sum or less - could come in the next few weeks
Another credit default swaps trader said the ruling in the government case would likely limit the scope of disgorgement. Yet no matter what investors and speculators will again hammer Altria's spreads on expectations of bad news.
"The market is still going to see that as risk out there," said the trader, adding that even the current level of the spread did not compensate for its historic volatility to bad news on litigation.
Similarly, analysts at Lehman Bros earlier this week reaffirmed their call for investors to shy away from tobacco-related credits due to the potential for yet more negative news.
The spreads on Altria's five-year credit default swaps traded as high as 244 basis points before settling down Friday around 215 basis points, or $215,000 a year for $10 million of default protection. Before the Florida Supreme Court decision, that spread traded around 160 basis points.
Altria's 7 percent notes due in 2013 rallied on Friday but remained 35 basis points wider against Treasuries this week at 199 basis points.
Moody's Investors Service provided relief this week by responding that the Engle case presented no immediate threat to ratings, and the agency reaffirmed the ratings of all major tobacco companies. Moody's rates Altria Baa2, two steps above junk. S&P on Friday also said tobacco corporate ratings remain intact.
Where some analysts see an opportunity is in Kraft Foods, which is mostly owned by Altria and tends to widen in sympathy on any bad news related to tobacco litigation. Kraft's five-year default swaps widened to as high as 60 basis points from 44 basis points, its highest since last September.
"We continue to believe that Kraft should be considered remote from tobacco litigation," said analysts Joe Morrison and Christopher Muir at ABN AMRO in New York, while giving a "marketweight" recommendation to Kraft.
Among the reasons they listed: Altria has few reasons to hurt its investment in Kraft; and as an independent, publicly traded company, Kraft's independent directors would have to approve sending cash to Altria and would be personally liable for harm suffered by shareholders.
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