Moody's removes NY tobacco bonds penalty on ruling

NEW YORK, Jan 16 (Reuters) - Moody's Investors Service said on Friday it will no longer rate tobacco bonds of New York counties one notch lower than similar debt sold by other cities and states following a federal court ruling.

A judge for the Southern District of New York in the Second Circuit dismissed claims filed by a cigarette maker that had not joined the 1998 national settlement between states and cigarette makers, Moody's said in a statement.

The ruling by Judge Alvin Hellerstein, which he reached in November and finalized on Jan. 12, upheld a statute that requires payments even from cigarette makers that had not joined the settlement.

The landmark agreement obliges Big Tobacco to pay the states more than $200 billion dollars over a period of years to reimburse them for the health care of ailing smokers.

"This favorable ruling for the defendants (the attorney general and the commissioner of taxation and finance of the State of New York) is a positive development for the tobacco settlement bonds sponsored by the New York counties," Moody's said in a statement.

Moody's said the ruling dismissing the plaintiffs' claims and dissolving the preliminary injunction preventing New York from repealing the Allocable Share Release Clause in its Escrow Statute, led it to remove "its one notch ratings distinction between bonds sponsored by states or governmental authorities located within the Second Circuit and in other federal circuits."

Many states, counties and cites around the nation have sold debt backed by the payments from tobacco companies; New York City was the first issuer to do so.

The debt has proved highly volatile because sales of cigarettes are declining and both the tobacco companies and the national settlement still face various court challenges.

Moody's stressed that New York counties' tobacco bonds are still "under review with direction uncertain because of the risks associated with other legal challenges to the Master Settlement Agreement and related legislation." (Reporting by Joan Gralla; Editing by Leslie Adler)