The Nassau County Tobacco Settlement Corp. bonds failed to make a debt payment Monday as the high-yield tobacco bond sector continues to come under pressure from declining cigarette consumption.
The June 1 lapse marks the first payment default in the tobacco sector, according to Municipal Market Analytics.
"A missed principal payment is not a technicality," said James Pruskowsi, managing director for Hennion & Walsh. "It is a harder signal than a missed interest payment and more difficult to attribute to timing or liquidity. It tells you the cash flow waterfall is not covering what it was structured to cover."
More than $10 million of NCTSC bonds traded hands this week at an all-time low of 52 cents.
The default comes as Nassau County's
Issued in 2006, the bonds total $510 million, including interest.
At a November board meeting, a NCTSC official said the board had talked with "major banks that are experts in the field," who said there are no opportunities for refunding or refinancing.
The missed June 1 payment marked the final maturity for the 2006 Series A bonds, the official noted.
Nassau's 2006 financing was part of a wave of tobacco bond deals brought by states that securitized payments from the multi-state 1998 Master Settlement Agreement, where cigarette manufacturers compensated the states for the cost of caring for sick smokers.
Under the agreement, tobacco companies pay states by April 15 each year based on a formula that's determined mostly by cigarette sales volume in the prior year.
This April's payment to Nassau totaled only $14.7 million, according to a
The payments are made in perpetuity, and the revenue will continue to flow to the NCTSC, meaning that interest will likely continue to be paid, MMA noted. Principal will also eventually get paid, but later than expected, the firm said.
Even before the missed payment, the tobacco sector was among the worst-performing high-yield sectors in May, and has been lagging the high-yield sector for months, said Kevin McGuigan, director at Municipal Market Analytics, in an interview.
Spreads for nonrated Buckeye 5s of 2055 have been relatively stable year to date, but since June 2025, they've widened more than 80 basis points. "So there's been some struggles there already, and this could potentially spook investors further," McGuigan said.
The "extension risk" built into tobacco bonds is understood by high-yield buyers, and institutional demand may not be affected by NCTSC's miss, MMA said in a June 3 report.
Retail holders, though, of high-yield funds, or even standalone tobacco bonds, could decide to sell amid fears of additional defaults and/or extension risk, so "this presents a potential, albeit moderate, liquidity risk to the tobacco sector, or high yield overall," the report said.
Mohammed Murad, head of municipal credit research at PT Asset Management, said he did not think the credit stress in tobacco would spill over into unrelated high-yield sectors. But Murad noted the market is already in an environment where investors may be more selective in their underwriting of credit.
Cigarette consumption has been on a long-term decline, and "the key question is how severe the decline is relative to how much stress a bond can absorb before reserves are tapped," he said.
Too-far-apart assumptions and actuals may produce a mismatch between cash flow and debt repayment, he noted.
Cigarette sales by original participating manufacturers are expected to decline by 9.5% in 2026 and 9% in 2027, the state of Colorado noted in a
"Every April 15, when tobacco companies make their annual payments to the states, the market gets a fresh reminder of how far volumes have fallen and how little room is left in the structure," Pruskowski said. "Coverage ratios were always thin and are getting thinner every year, and once a reserve gets tapped it tends to stay tapped."
Some states,
NCTSC bonds have slumped over the past year, dropping from 85.5 in June 2025 to 52 on Monday. The price drop accelerated after Dec. 1 when the board dipped into reserves to make the December bond payment, a move that pushed the reserve account below required levels.
Following that draw, on Dec. 11, S&P Global Ratings Agency dropped the debt to CC from CCC-plus, a move that reflected the "virtual certainty of default," the agency said.
Nassau tobacco bonds were originally rated investment grade, Pruskowski noted, but have been in the speculative market for more than 10 years. "For holders who bought this paper at or near par believing the rating told the whole story, the secondary market is now telling a very different one," he said. "Now, challenging decisions must be made."
The default is not expected to impact Nassau County, Fitch Ratings said in a recent ratings report that gave the county an AA rating on its $280 million of GO general improvement bonds, set to price around June 10.
Fitch said it does not believe the principal payment delinquency on the NCTSC's 2006 bonds is relevant to Nassau County's general creditworthiness.
