Tobacco Payments Dip as Smokers Quit

The Bond Buyer reports:

The payments that cigarette manufacturers make to the states are dwindling as people smoke less, posing the latest setback to tobacco bonds — a sector that’s enjoyed little good news since the financial crisis.

The legal settlement payments act as collateral for nearly $56 billion of bonds, according to Bloomberg LP. Most of the bond structures they support were devised assuming modest declines in tobacco consumption over time and rising settlement payments. That scenario is now in doubt, with cigarette consumption plunging 9.3% last year by one measure — about five times more than forecast.

“We saw a consumption decline that was above and beyond our base-case expectation,” said Aoto Kenmochi, a tobacco bond analyst at Fitch Ratings. “All the excise tax that went in had a really negative impact on consumption.”

The precipitous decline in payments threatens to leave some tobacco bonds outstanding longer than expected. In the worst cases, the withering payments could eventually push some bonds into default.

Great moments in extortion finance. Please remember those story the next time a politician claims raising tobacco taxes will definitely bring in more tax revenue.