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.