The state of Virginia on Tuesday withdrew a tobacco-settlement bond offering, the first such sale cancellation stemming from rising worries about the bonds' safety.
California officials were trying to decide whether to proceed with a planned sale of $2.3 billion of the securities April 15.
The market for the tobacco bonds -- which have helped close budget gaps in many cash-strapped states -- has been thrown into disarray since March 21. That was when an Illinois court ordered cigarette giant Philip Morris to pay $10.1 billion for deceiving smokers by advertising "light" cigarettes as less harmful.
The court required Philip Morris to put up $12 billion to cover damages owed, even as the company appeals. Philip Morris' parent, Altria Group Inc., has said it can't post that amount.
Credit-rating companies Moody's Investors Service and Standard & Poor's have said Philip Morris may have to seek bankruptcy protection if the collateral isn't reduced.
Philip Morris failed to reach a compromise Tuesday to reduce the collateral requirement, Bloomberg News reported. Lawyers for the firm met with plaintiffs attorney Stephen Tillery, a mediator and representatives from the Illinois attorney general's office to negotiate a smaller sum. No new sessions are scheduled, Tillery said.
Money problems at Philip Morris could jeopardize its ability to make payments to 46 states, as required under a 1998 deal that settled the states' major health liability suits against the tobacco industry.
The tobacco companies agreed to pay more than $200 billion to the states over 25 years. In turn, some states have issued bonds backed by the future payments as a way to advance themselves some of the settlement money.
On Monday, Moody's downgraded $19 billion of the tobacco bonds, citing rising concerns about the cigarette companies' ability to make payments owed.
The downgrade sent yields soaring on some of the outstanding tobacco bonds Tuesday as the bonds' prices slumped.
California sold $3 billion in tobacco bonds in January. The longest-term issue, maturing in 2039, was sold with a tax-exempt yield of 7%. On Tuesday, traders said those same bonds were quoted with yields as high as 8.25% as potential buyers demanded higher returns to compensate for the perceived higher risks.
Virginia, citing market conditions, on Tuesday withdrew a $767-million tobacco bond offering that already was underway.
If California proceeds with its planned sale of $2.3 billion in bonds, it could be forced to pay extraordinarily high rates to lure buyers, bond traders said.
California officials said they hadn't decided whether to go ahead. "We will continue to monitor closely all events in the marketplace, and we will make a decision in the next few days on whether to postpone the sale," said Mitchel Benson, communications director for California Treasurer Phil Angelides.