Law firms have smoked out a lot of cash helping state and local governments securitize their 1998 settlement with Big Tobacco.

That's why they're breathing easier in the wake of an Illinois judge's decision to cut the size of a bond that Philip Morris USA has to pay to appeal a multibillion-dollar jury award against the company. "A substantial cloud has been removed," said Roger Davis, the partner who heads Orrick, Herrington & Sutcliffe's municipal finance practice. The Orrick team has been one of the top legal forces in the efforts to securitize tobacco settlements. For the past month, state and local governments have been panicky about the impact of Philip Morris' face-off with the Illinois judge. In March, Madison County, Ill., Circuit Judge Nicholas Byron ruled that Philip Morris had to put up $12 billion to appeal a $10 billion judgment. Philip Morris said paying that amount could bankrupt the company and prevent it from making its next scheduled payment of $2.5 billion to the states. The payment is scheduled for today. Byron relented Monday, allowing the company to dole out $800 million in cash, payable in four installments, and to put a pre-existing $6 billion long-term note in escrow pending the resolution of the case. With that, Philip Morris said it would be able to make its settlement payment to the states. The showdown has meant dark days for states that had hoped to issue revenue-generating bonds on the settlement -- particularly those facing vast budget deficits. California Treasurer Phil Angelides announced April 3 that the state had put on hold its sale of $2.3 billion in tobacco securitization bonds. The bond sale had been scheduled for today. Two days earlier, Virginia canceled its $767 million tobacco bond offering. "The decision to delay the bond sale is due to litigation developments involving the tobacco industry and the financial markets' reaction to those developments," Angelides' office said in a statement. Both Orrick Herrington and Sidley Austin Brown & Wood have pioneered the complex securitization transactions. Under a 1998 agreement, the four major tobacco companies agreed to pay 46 states an estimated $246 billion over 25 years to settle health liability suits. The tobacco bonds have been used by states as a way to obtain tobacco payments right away rather than over 25 years. For the firms, the deals are more lucrative than the run-of-the-mill bond offerings they generally handle for government agencies. They involve selling a percentage of the settlement to a third party, which issues bonds secured by the revenue stream from the settlement. "There's certainly a feeling of relief and also that this is the reasonable and rational thing to do," Orrick's Davis said of the judge's decision. "Things ought to proceed on a stable footing." California sold the rights to 56.57 percent of its share of the tobacco settlement to Golden State Tobacco Securitization Corp. -- a nonprofit entity established to issue bonds. In return the state was to receive $4.5 billion of net proceeds issued in two series. In January, the corporation sold $3 billion in bonds and the state got $2.5 billion of the net proceeds, which was deposited in the state's general fund. The rest was to have been issued in the bond sale today. Though the Illinois judge's order has been watered down, it did cause some nail-biting for lawyers. Sidley Austin partner Max Von Hollweg, who represents the underwriters in the Virginia deal, said that transaction was pulled from the market after Moody's Investors Service downgraded tobacco securitization bonds. "That's about as big an upset as you can get," Von Hollweg said.

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