The company is tapping the market as borrowing costs for high- risk, high-yield borrowers are close to the lowest in three months, relative to US Treasuries. The bond sale may come in the next six months.

The combined company may have debt exceeding $11 billion, more than ten times a widely used measure of cash flow, said Dennis Saputo, a senior vice president at Moody's Investors Service. At that level, Intelsat would be "bordering on insolvency if not insolvent" after such a deal, he told Bloomberg.

"That's deep, deep junk," New York-based Saputo said in an interview. "I'd be surprised if they'll be able to fund this thing with all debt, but the capital markets are frothy."

The extra yield, or spread, investors demand to hold junk bonds, instead of Treasuries, averaged 370 basis points on September 2, down from a peak of 458 basis points on May 17, and below the ten- year average of 490 basis points, Merrill Lynch & Co. data show. A basis point is 0.01 percentage point.

Soaring demand helped cut borrowing costs as daily high- yield bond issuance more than halved to an average of $303 million in August, from $668 million in June, according to data compiled by Bloomberg.

"There's still a tremendous demand for high-yield and fixed-income assets and that's not going to abate anytime soon," said Michael Collins, who oversees about $13 billion in high- yield bonds for Prudential Investment Management's fixed-income team in Newark, New Jersey.

Moody's may cut Intelsat's Caa1 rating, just three levels above default, once details about the financing are public, Saputo said. Wilton, Connecticut-based PanAmSat is ranked one rung higher at B3. The union of the two companies will make the world's largest satellite provider.

Leveraged buyout firms disclosed $188 billion of takeovers this year, about 50 percent ahead of 2004's record pace, Bloomberg data shows. In an LBO, buyers borrow about two-thirds of the purchase price to fund acquisitions, and the debt is typically issued in the target's name.

Lower credit ratings are "really a function of the amount of debt," Intelsat Chief Executive David McGlade said in an interview from the company's administrative headquarters in Washington. "It's not about business fundamentals."

In addition to the debt, Intelsat will pay $3.2 billion in cash for PanAmSat, whose customers include MTV and CNN. The company has arranged $7 billion in loans. Merrill Lynch's US High Yield Master II Index has about $648 billion of junk bonds. The index's average maturity was 8.4 years with a yield of eight percent on September 2, compared with an average of 7.86 years and 10.6 percent over the past five years.

"Risk appetite has been revived" after bonds sold to fund some leveraged buyouts performed well, said Paul Scanlon, managing director and team leader of US high yield at Putnam Investments in Boston, which manages $65 billion in bonds.

Intelsat's 7.625 percent note due in 2012 yielded 10.6 percent as of 10:35 a.m. New York time, and traded at 86.25 cents on the dollar, according to Trace, the bond price reporting system of the NASD. The spread on Intelsat's notes was 669 basis points, according to Trace.

Intelsat's debt after the acquisition may be about ten times its earnings before interest, taxes, depreciation and amortisation, or Ebitda, unless the terms of the transaction change, Moody's Saputo said.

At that level, leverage would be double the average for all leveraged buyouts during the first half of the year, according to Standard & Poor's.

"With that kind of leverage, they're going to have to present a pretty good story to investors," said Eric Misenheimer, director of high yield and manager of $550 million in junk bonds at J&W Seligman & Co. In New York. Misenheimer said he was considering buying the new bonds.

Last month investors snapped up SunGard Data Systems's $3 billion of junk bonds, the biggest such sale since Charter Communications issued $3.6 billion on March 12, 1999, Bloomberg data shows.

Wayne, Pennsylvania-based SunGard's $11 billion LBO was the largest since Kohlberg Kravis Roberts & Co. took over RJR Nabisco for $31 billion in 1989.

Intelsat's $4.2 billion sale would be the second-biggest junk-rated issue after RJR's $8.5 billion offering. New York- based KKR is one of the three biggest investors in PanAmSat.

Intelsat, which has $5.8 billion of bonds, issued $2.55 billion of notes on January 24 to finance its takeover by four leveraged buyout firms.

In February, the company sold $300 million of debt to pay a dividend to its investors. Moody's cut Intelsat's rating one level after the dividend deal, saying the company was "inclined to aggressively use leverage for financial rather than business purposes".

PanAmSat's buyout firms reaped dividends of around $446 million since investing $548 million in equity last year.

Intelsat has a history of issuing large dividends to shareholders and hasn't won over bondholders, said KDP Investment Advisors in Montpelier, Vermont, high yield analyst Patrick Bonebrake.

PanAmSat will continue to pay dividends to its shareholders, Noah Asher, Intelsat's senior vice president said in an interview. He declined to say whether Intelsat plans to sell bonds to pay equity investors a dividend.

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