The Economist looked at the odd case of cigarette bonds:

• In 1998 the major cigarette manufacturers agreed to make annual payments to the American government to cover the historic and future healthcare costs caused by their products.
• Instead of waiting to receive these payments over time state governments decided to sell bonds – investors would pay an initial sum to the government up-front, and the government would send future payments from the cigarette manufacturers to the investors.
• These are about $100 billion of these bonds in the market today.
• Yet they aren’t making as much money as investors had expected. Cigarette sales have fallen faster than expected and since that means that fewer people have cigarette-related health issues, the companies have to make fewer payments.
• Falling rates of smoking are driven, in part, by government efforts to ban indoor smoking and raise cigarette taxes. This means the governments played it pretty smart by selling off the bonds…then enacting measures that would make them less valuable.

Read more about some states that may still have to pay for the bonds, why cigarette makers agreed to the settlement, and who bought these bonds over here.

Source: The Economist