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.

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.