Jefferson Smurfit Group plans to raise €670 million in corporate bonds to replace existing, more expensive debt and to pay a dividend to shareholders.

The company, taken private in a €3.8 billion deal in 2002, will replace around €370 million of notes carrying an interest rate of 15.5 per cent with 10-year notes that are expected to offer interest of around 7.5 per cent.

Separately it will issue €300 million of "pay in kind" notes. These will carry interest of around 11.5 per cent. Pay in kind notes are the least secure form of corporate investment after shares, which explains the higher interest coupon.

In addition, interest is not paid quarterly or half-yearly as with most corporate bonds but rolled over and paid when the note matures, increasing the risk.

The "pay in kind" notes will fund a dividend for the shareholders, led by Madison Dearborn which funded the privatisation of the group. An effort to raise €250 million in bonds for a similar exercise last year was abandoned when prospective investors demanded a yield of 12 per cent.

The decision by the company to restructure and assume greater debt led Standard & Poor's to reduce its long-term credit rating to BB- from B+. The company said the move was "not unexpected".

Chief financial officer Mr Ian Curley said the company's interest bill following the proposed issue of bonds would be the same as before the recent sale of Swedish subsidiary Munksjo.

The company said the timing was right for the fundraising, with strong market demand. It also expressed confidence that the restructured group was well-positioned to produce sufficient cashflow to meet its obligations.

However, it is understood that the debt issue will delay any move to refloat the group .