Smoke Signals From Buckeye Tobacco April Payment Underscore Sectorwide Scarcity, Shifting Consumer Patterns

April 15 was the day tobacco companies were required by law to make their annual payments to the states under the 1998 Master Settlement Agreement, or MSA. For Ohio’s Buckeye Tobacco Settlement Financing Authority, or BTSFA, this year’s deadline carried more weight than any in recent memory. But as of publication, no payment had been posted to EMMA. The authority told Octus it does not have additional information to share at this time other than what is publicly available.

After drawing on its reserves to cover debt service payments it could not fund from operating cash flow alone, the authority is counting on this year’s tobacco settlement receipts to begin restoring a reserve balance that has fallen well below its contractually required floor.

BTSFA drew $24.9 million in December to help fund an $81.6 million semiannual interest payment due Dec. 1, 2025, according to a disclosure posted on EMMA, leaving a reserve at $142.7 million, against a required floor of $170.9 million – a shortfall of $28.2 million. The trajectory is unlikely to reverse, according to a person familiar with the situation.

Once a reserve is tapped, it tends to be tapped every December until cash flows deteriorate enough that draws are needed in June as well, at which point the reserve bleeds toward zero ahead of final maturity, according to the person familiar with the situation. Over the past 25 years, all shipment volatility has moved in a down direction, that person said.

It is not an event of default. But the back-to-back reserve depletions – the first time debt service has fallen short since the authority’s 2020 restructuring – have focused attention squarely on the spring settlement cycle as the year’s consequential cash flow checkpoint.

“There is no deadline risk in the structure,” said James Pruskowski, managing director for Hennion & Walsh. “But there is a recurring liquidity and price discovery moment that can matter disproportionately in a thin, scarcity-driven market.”

Ohio received $222.6 million in tobacco settlement revenues in April 2025, covering the 2024 cigarette sales year. According to draft minutes from the authority’s September 2025 board meeting, Ohio could possibly receive an additional $25.6 million, its allocated share from the disputed payment account for the 2007 nonparticipating manufacturer, or NPM, adjustment, as early as this month, contingent on other states completing their own arbitration proceedings. Ohio received its arbitration award on March 31, 2025, with the panel unanimously finding that Ohio diligently enforced its qualifying statute during calendar years 2005, 2006 and 2007.

Other States

Ohio’s disputed payment situation is part of a broader pattern. Since at least 2003, tobacco manufacturers have systematically withheld portions of annual MSA payments from states through NPM adjustment disputes, diverting funds into a disputed payment account pending arbitration that can take years to resolve.

Iowa, for instance, sued Philip Morris and R.J. Reynolds in 2022 over $133 million in withheld payments, describing the practice as a “calculated strategy” to reduce payment obligations, and ultimately settled in 2023 for more than $171 million over six years. Montana recovered $100 million through similar litigation in 2020. New York settled its own disputes in 2015 and 2016 and recovered about $701 million.

Under the MSA, tobacco companies pay states by April 15 each year based on a formula primarily tied to cigarette sales volume in the prior year. Those receipts flow through the bond’s payment waterfall, covering expenses, debt service, turbo redemption features and residuals in strict priority, before reaching the reserve.

The size of this year’s payment to Ohio will depend on how many cigarettes were sold domestically, a number that has been declining at an average of 5.4% annually since 2009, according to an Invesco analysis of the asset class.

The market has long survived on structural scarcity. Tobacco securitizations were largely front-loaded, the product of a one-time settlement with annual payments in perpetuity. States that securitized those payments issued bonds backed by the cash flows, then largely stopped issuing. What comes to market today is refinancing or restructuring-driven, not net new supply.

That scarcity has sustained a buyer base by making tobacco bonds the highest-yielding paper available to yield-constrained accounts with limited substitutes, Pruskowski said.

But the underlying revenue picture has continued to erode. Annual U.S. cigarette pack sales fell 27% in just six years to 9.1 billion packs in 2021 from 12.5 billion packs in 2015, according to the Centers for Disease Control and Prevention, or CDC.

Adult smoking rates fell to 11.6% in 2022, down 17% from 2017, alone. Smokers, however, are not quitting nicotine. They are switching products. From 2017 to 2023, the number of adults who exclusively smoked cigarettes fell by about 6.8 million, offset by a roughly 7.2 million increase in those who exclusively use e-cigarettes, according to CDC data.

MSA payments are tied to cigarette sales only, not to e-cigarettes or other nicotine alternatives. Among adults under 30, the share who smoke cigarettes has collapsed to just 6% today from 35% in the early 2000s, according to Gallup, a structural headwind for bonds with maturities running to 2046 and beyond.

Colorado, a representative MSA state, received $77 million in 2025, below what forecasters had projected, according to National Association of Attorneys General payment data and a forecast published by Colorado Legislative Council Staff.

Ohio’s 2025 MSA payment is its lowest since inception in 1999. After holding between roughly $270 million and $330 million for more than two decades, receipts dropped in 2023 and continued their declining trend, as shown below:
 

Institutional behavior is not one of wholesale derisking but of incremental repositioning, a “gradual upgrade bias beneath the surface,” with higher-quality structures retained or added on weakness while lower-quality and longer-duration paper faces softer secondary support, Pruskowski said.

January’s Secondary

Buckeye now trades in the secondary market at yields more than 5 percentage points above where comparable paper priced at issuance. On Jan. 8, $149 million of Buckeye’s Series 2020B-3 capital appreciation bonds traded in a single day across seven transactions at prices at about 7.75 cents on the dollar with yields near 8.35%, according to EMMA.

By early February, prices had slipped further toward 7.5 cents with yields near 8.46%. Pruskowski described the January print as likely “a one-off block rotation tied to balance sheet or fund-level repositioning,” either a portfolio liquidation, a rotation into higher-quality MSA paper or a dealer transferring risk.

Holders of shorter-dated maturities are effectively being cross-subsidized through the shared Class 2 reserve pool, according to a person familiar with the deal, giving holders of longer-duration paper such as the B-3 bonds a structural incentive to exit before that dynamic intensifies, that person said.

The 2020 refinancings produced ratings upgrades that some market participants found difficult to justify: the same cash flows, at roughly the same leverage, repackaged into BBB and A territory, according to the person familiar with the market. The consequence is that the deterioration now playing out is doing so partly inside investment-grade mandates, not just high-yield ones, they said.

The longer-term risk of scarcity, which has kept tobacco bond yields compressed, could eventually become a liability if the buyer base narrows. Pruskowski identified three conditions that together could trigger a sustained break in technical support: a credible downshift in MSA cash flow projections running faster than originally modeled; a secondary liquidity fracture in which dealer bids fail to follow size; and a shift at the mandate level in which institutional accounts begin tightening eligibility or duration limits on tobacco exposure. None have been fully met.

But April’s payment and the disclosures that follow in coming days and weeks will determine how much closer Buckeye is to the first condition. “Once the buyer base narrows,” Pruskowski said, “spreads tend to gap rather than grind, because the market lacks a deep alternative bid.”