California’s Golden State Tobacco Securitization Corp., the entity that issues bonds secured by the state government’s settlement with cigarette companies, will again have to dip into reserves come December to make interest payments.

The corporation said in filings to the Municipal Securities Rulemaking Board’s EMMA website that it will withdraw around $9.5 million from its reserve accounts for two series of bonds issued in 2005 and 2007 to help make a more than $155 million interest payment due Dec. 1.

The draws will be the second in as many years.

Last December, the corporation drew $12 million out of its reserves to make its Dec. 1 interest payment of the same amount on the bonds.

Municipal market participants and rating analysts started warning last year that the sector suffers from major revenue problems that will force some issuers to dip into reserves.

Analysts have said the two main reasons why states are being forced to use reserves are people have been quitting smoking at a faster rate, resulting in less revenue for manufacturers, and tobacco firms and states are in a dispute over settlement payments.

California, Ohio and Virginia have so far been forced to tap reserves to make debt service payments.

California’s financial problems are at least partially due to the fact that officials were forced to invest their debt-service reserve fund in low-yield securities after guaranteed investment contracts with Lehman Brothers evaporated during its bankruptcy.

If the trend continues, analysts have warned that defaults could begin by 2024.

Tobacco bonds are backed by payments made under a 1998 Master Settlement Agreement that requires tobacco manufacturers to make annual payments to states based on consumption and other factors.

Because of an ongoing dispute, tobacco firms have been putting part of their annual payments into a so-called disputed-payment account.

Subscribe Now

Independent and authoritative analysis and perspective for the bond buying industry.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.