US HIGH YIELD-American Cellular cancels $425 mln junk bond sale

By Dena Aubin

NEW YORK, March 7 (Reuters) - Rising interest rates in the U.S. junk bond market have prompted a unit of Dobson Communications Corp. DCEL.O to scrap a $425 million bond sale, the latest sign that demand for the riskiest bonds is beginning to cool.

Dobson's American Cellular Corp. said volatility in the bond markets had made pricing unattractive and it would seek financing in the loan market instead. The company was raising cash to pay for a tender offer to repurchase older notes, it said in a statement late on Tuesday.

The cancellation followed a sell-off in global equities last week that caused a sharp downturn in appetite for the riskiest bonds. The planned bonds carried highly speculative "triple-C" ratings from Standard & Poor's, one of the lowest possible rating categories.

"I do think that bringing a new 'triple-C' bond is just going to get tougher," said Robert Grimm, co-head of the high-yield group at J. Giordano Securities in Stamford, Connecticut.

"There's enough concern with what's happened in the equity markets, with what's happened in the subprime markets, that it's just going to be more difficult, as it probably should have been all along," Grimm said.

Concerns about the market for subprime mortgages, those to consumers with shaky credit, were one of the factors behind turbulence hitting the stock market last week.

Since the financial markets rout began on Feb. 26, "triple-C" bonds' spreads, or the extra yields they pay over Treasuries, have risen by about 50 basis points to 495 basis points, according to Merrill Lynch data.

American Cellular is also reducing the size of its tender and is now offering to purchase only $675 million of outstanding notes, down from an original $900 million, the company said.

The company is obtaining a new $1.05 billion senior secured credit facility to replace an existing $250 million facility.

The company did meet strong demand in the loan market, however. It was able to reduce interest rates on the term loan part of the facility to 200 basis points over the London interbank offered rate, down from an original 225 basis points, according to Reuters Loan Pricing Corp.

Easy financing for the riskiest borrowers has been a key factor in keeping default rates low and has helped fuel a record pace of leveraged buyouts and other acquisitions.

Even after the recent weakness, spreads on triple-C bonds remain about half of what they normally would be, according to Moody's Investors Service, but that may be changing.

The lowest-rated companies have enjoyed the biggest discount in spreads, so "it's that segment where spreads are going to be subject to the most pronounced widening as investors approach risk more cautiously," said Moody's chief economist John Lonski.

Still, ample access to credit in the loan market means that any kind of credit crunch for low-rated borrowers is unlikely, Lonski said.

After its tender offer size was reduced, American Cellular's 10 percent notes due in 2011 declined to 105.75 cents on the dollar early on Wednesday, down about one cent, according to high-yield research firm KDP Investment Advisors.