NEW YORK (Bloomberg) — Digicel Group Ltd., the largest mobile phone company in the Caribbean, is using principal payments on a $794 million debt package to create new borrowings, signalling increased tolerance for risk.

Citigroup Inc. arranged the loan in which each principal paydown by Digicel on the existing credit agreement will automatically fund the new debt that has a higher interest rate and longer maturity, according to Lawrence Hickey, chief financial officer of the Bermuda-registered company.

The market is reopening for risk after the S&P/LSTA US Leveraged Loan 100 Index returned 52 percent in 2009 and gained another 5.51 percent this year through yesterday. The Digicel agreement is a "novel" example of recent loan structures that are more aggressive with tighter spreads and looser covenants, said Gerry Granovsky, vice president, senior credit officer at Moody's Investors Service in New York, who covers the company.

"I have not seen this before," he said in a telephone interview. "This is a natural evolution of bankers trying to be inventive."

Alex Samuelson, a Citigroup spokesman, declined to comment.

Companies typically seek so-called amend-and-extend agreements to defer the maturity of a loan. Lenders that agree to extend their debt are usually paid a higher interest rate.

Digicel's new loan structure is unconventional and will save the company money compared with a traditional refinancing because the interest on the initial debt continues at 2.5 percentage points more than the London interbank offered rate, while increasing to 3.5 percentage points over Libor only on the extended portion as that credit line builds up, according to Hickey. Libor is the rate banks charge to lend to each other.

"We didn't want to do a refinancing because refinancing by definition means repaying an existing facility and drawing down a new one, so we did an extension," he said in a telephone interview.

Lenders of about 70 percent of Digicel's loan package agreed to extend maturities on the debt, which amortizes from March 2012 to March 2015, Hickey said in the interview. The remaining 30 percent of the borrowings continue to amortize in five equal installments starting last month through March 2012.

Digicel also increased the size of the loan by $75 million from existing and new investors, Hickey said. The financing, through the company's Digicel International Finance Ltd. unit, includes a lender group of about 30 banks and institutional investors, he said.

"We were very happy with the level of participation," Hickey said. "There was great confidence in us by our banks that believed in our business."

The loans are typically used for specific acquisitions or to enter new markets, he said.

Digicel, which began in 2001, had 8.2 million customers as of March 31, 2009, according to its Web site. The carrier operates in 26 markets in the Caribbean and Central America including Aruba, Bermuda and the British Virgin Islands, and six markets in the Pacific.