The private-equity consortium that bought control of Philips’ chipmaking business plans to refinance the debt that supported the deal with the sale of €4.5bn in junk bonds, which would be Europe’s biggest such issue.

Kohlberg Kravis Roberts and Silver Lake Partners of the US and Alpinvest of the Netherlands won the battle to buy 80.1 per cent of the semiconductor division of Philips, the Dutch technology group, for €6.4bn last Thursday.

The proposed bond sale comes as many leveraged buyout sponsors look to fund their deals in the private and more flexible loan markets, which have seen rapid growth as hedge funds and other investors take the place of banks as owners.

However, junk, or non-investment grade, bond issuance is being supported by bigger deals that cannot resolve all their financing needs in loan markets. Fewer, larger deals are dominating issuance, according to a report from Fitch Ratings on Monday.

Matthias Volkmer at Fitch said the increased use of mezzanine debt instruments meant that the junk bond market was struggling to replace the high amount of bonds being redeemed in spite of record issuance in the first half.

“However, with the growing acceptance of floating-rate notes and the trend among large sponsors towards multi-billion euro transactions, high yield remains a healthy product and asset class,” Mr Volkmer said.

The largest European junk bond deals were both sold in the first half of this year, according to data from Dealogic. The current record is the €2.4bn deal from Ineos, the UK chemicals company, done in January, while the second largest is TDC’s €2bn deal from April.

A €4.5bn bond from Philips will add to record first-half volumes for European junk-bond sales, according to Fitch.

Issuance totals €19.4bn for the six months of 2006, the strongest first half since the agency began measuring the market in 2001 and beating 2004’s previous record of €16.6bn in the first half.

One banker involved with the Philips bond sale, which will be led by investment banks Morgan Stanley, Merrill Lynch and Deutsche Bank, said demand was expected to be strong because it was a high quality business and investors were holding a lot of cash.

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