(Bloomberg) -- A Blackstone Inc.-backed company that makes a product for cigarette filters is dangling the highest coupon from a junk-rated bond issuer in eight months, as do-good investors shy away.

Cerdia Finanz GmbH is looking to raise $600 million with a 10.5% coupon and a discounted price of 97 cents on the dollar for an all-in yield of about 11.3%, according to people familiar with the matter who asked not to be named discussing a private transaction.

The five-year secured notes would offer the highest coupon since May 2021, when two deals priced at 10.5% and 10.75%, according to data compiled by Bloomberg. Cerdia’s debt is being offered at such a high yield in large part due to its association with the tobacco industry, a major concern for money managers in the era of socially responsible investing, the people said.

Cerdia’s deal is expected to market through Thursday and proceeds will be used to refinance existing debt.

Representatives for Blackstone and Jefferies Financial Group Inc., which is leading the deal, declined to comment. A spokesperson for the issuer didn’t immediately respond to a request for comment. 

ESG Concerns

The deal comes as demand for new junk bonds stayed relatively strong even as yields rise amid broader equity volatility, with five more borrowers expected to price deals later this week. The U.S. junk-bond index posted modest gains of 0.03% Wednesday and yields closed at 4.98%, down 1 basis point. 

The tobacco sector is grappling with the rise of money managers targeting environmental, social and governance factors. In August 2021, Philip Morris International Inc. laid the groundwork for issuing debt with an embedded promise to wean itself off cigarette sales.

Read More: Philip Morris to Court ESG Investors Whose Mantra Is Shunning It

Cerdia makes filter tow for cigarettes. It generated 93.9% of its net sales from sales of tobacco products in the twelve-month period ending September 30, 2021, according to bond documents seen by Bloomberg.

The company touts a commitment to sustainability on its website, and says it uses environmentally friendly materials that help in the production of biodegradable cigarette filters. Cerdia spent about 29% of its capital investments on environment, health and safety goals such as optimizing energy consumption, in the 12 months through end-September 2021, according to the bond documents.

Moody’s Investors Service assigned a B3 rating to the proposed Cerdia notes with a stable outlook, and S&P Global Ratings gave a B-, both six steps into junk. Moody’s cited Cerdia’s established position in the filter tow industry, a predictable client base for now with good revenue visibility and high margins.

“While structurally declining, Moody’s expects the end market for tobacco to remain stable, and the Covid 19 crisis did not materially impact this market,” the analysts wrote in a note Monday.

The positive trend will likely enable Cerdia to generate positive free cash flow of about $20 million starting from 2023, they added.

The refinancing will improve the company’s liquidity headroom for years to come, S&P analysts wrote. 

(Updates junk bond market color in paragraph six, and adds more analysis from S&P in the last paragraph)

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