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If you thought the tobacco wars were over, look again. Now that billions in settlement money is headed to local governments, the battle has shifted to one between law firms vying to securitize the windfall for hundreds of communities. “All of a sudden, out of the blue, comes an unexpected and unique revenue stream” flowing into county and municipal government budgets, says Roger Davis, San Francisco-based head of Orrick, Herrington & Sutcliffe’s public finance department. Orrick and a few other firms with expertise in both securitization and municipal finance stand to score a ton of work from county and city governments that opt to hedge their risk against a bunch of uncertainties that could reduce their share of the settlement or restrict its use. Tobacco companies agreed to pay more than $200 billion to state and local governments over the next 25 years, but the exact sums could change in the future. For instance, cigarette sales may drop, or the federal government could seek reimbursement for tobacco-related Medicaid costs that would cut into each state’s share. And what if a tobacco company involved in the settlement goes bankrupt? That’s a possibility, given that manufacturers are still facing lawsuits like the Florida class action that cost companies $145 billion in punitive damages last month. Shifting the risk to a bond lender would also give governments a chunk of money right away — to finance big projects as well as appease constituencies chomping at the bit for a cut of the settlement. Then, there’s the moral dilemma. “The counties also find themselves in this awkward situation of hoping the tobacco industry does well,” Davis says. “Now they have an investment in the tobacco industry.” So far, just a handful of counties have committed to securitizing their settlements, but many are considering it. Three counties in New York were the first to complete a tobacco settlement-backed bond sale. In California, none have been done, but one could be coming soon. San Diego County hired Orrick last month as bond counsel and selected New York’s Brown & Wood, another player in tobacco securitization, as disclosure counsel. According to the settlement agreement, the county is supposed to get $944 million over 25 years. Orrick is also bond counsel for Sacramento County and Orange County, which is awaiting the outcome of a health initiative vote before taking action. “Sacramento is rapidly moving ahead,” says Davis, whose firm is considered the nation’s leader in public financing. The firm has been approaching government officials about the prospect of securitizing tobacco settlements, but investment bankers are also doing some persuading. “People could see this coming and, of course, whenever there is money, there are investment bankers trying to make it better,” says attorney Richard Jones of Los Angeles’ O’Melveny & Myers. O’Melveny has been hired as underwriter counsel in Orange County and is bond counsel to Los Angeles County, which is supposed to get $3.3 billion. But Jones says officials there have not yet made a decision on what to do.

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