Aug. 7 (Bloomberg) -- Corporate America is losing its cachet in the bond market.

TXU Corp., the Dallas-based power producer, shopping center developer Kimco Realty Corp. and at least eight more companies bowed to investor demands this year and agreed to pay higher interest on their debt if credit ratings fall, according to data compiled by Bloomberg. Atlanta-based Home Depot Inc., the world's largest home improvement retailer, may be next.

Just two months ago borrowers were dictating terms of debt sales as corporate defaults fell to a record low. Now, companies need to finance more than $200 billion of announced takeovers and $500 billion of planned share buybacks just as investors grow more skittish about declining credit quality.

``The pendulum is swinging back to the investors' side of the bargaining table,'' said Tom Murphy, investment-grade bond manager at RiverSource Investments in Minneapolis, who helps oversee $95 billion in fixed-income assets.

Creditors are becoming more demanding as investment grade bonds returned 1.11 percent in the first seven months of 2007, headed for the worst year since 1999, when they lost 1.89 percent, according to index data from Merrill Lynch & Co., the third-largest U.S. securities firm by market value.

About $70.6 billion of bonds are at risk of losing investment-grade credit ratings, more than double the amount at the start of the year, data from New York-based Merrill Lynch show. David Rosenberg, the firm's chief economist, said in a report yesterday that the Federal Reserve will cut interest rates in October as turmoil in credit markets and falling home prices slow U.S. growth.

LBOs, Buybacks

The risk of owning investment-grade corporate bonds rose to the highest in at least three years last month, based on the benchmark CDX North America Investment-Grade Index of credit- default swaps on 125 companies.

Companies on average pay an extra 1.3 percentage points more in yield over Treasuries to sell bonds, the most since mid- 2003, Merrill data show. Sales of investment-grade bonds slowed last month to $37 billion, the least since April 2005, according to data compiled by Bloomberg.

Private-equity firms have announced a record $706 billion of leveraged buyouts this year, Bloomberg data show. U.S. companies bought back a record $655 billion of shares in 2006 and announced another $517.1 billion this year, according to Birinyi Associates Inc. of Westport, Connecticut.

Both drive down debt ratings. Investors seeking protection are demanding so-called step-up clauses to preserve the value of the securities. Ten companies offered the provisions with bonds this year, more than in the past three years combined.

Step-Up Bonds

Step-up bonds typically require a company to pay 0.25 percentage point more in interest if its bonds fall below investment grade. Each downgrade is accompanied by a further increase, up to about 2 percentage points, Hans Mikkelsen, an analyst at Charlotte, North Carolina-based Bank of America Corp., the second largest U.S. bank by market value, wrote in a July 12 report.

Debt rated below Baa3 by Moody's Investors Service and BBB- by Standard & Poor's is considered high-yield, high-risk, or junk.

``Times were good for so long,'' said Parham Behrooz, a money manager who oversees $18 billion of fixed-income assets at Tattersall Advisory Group in Richmond, Virginia. ``The market's pushing back and saying enough is enough -- we're not going to do this anymore.''

Home Depot

Home Depot may be the next borrower to face investor demands for step-up provisions, Behrooz said.

The company said June 19 it plans to repurchase $22.5 billion of stock, or 32 percent of its shares, and would sell $12 billion of bonds to help pay for the buyback.

Moody's cut Home Depot's credit rating four levels to Baa1, or three levels above high-yield. S&P reduced its ranking three steps to an equivalent BBB+.

The price of $9 billion of bonds Home Depot sold in five issues last year fell as much as 2.5 cents on the dollar since the buyback announcement, costing investors $125.2 million.

``Investors took a pretty huge hit,'' Behrooz said. ``That's why there's a groundswell of people asking for coupon step-ups.''

Home Depot's willingness to include a step-up provision may encourage investors to be more demanding, Bank of America's Mikkelsen wrote in his report. Paula Drake, a Home Depot spokeswoman, declined to comment on ``speculation.''

Home Depot included a so-called poison put clause in bonds it sold in December, which allows investors to sell their securities back to the company at 101 cents on the dollar if there's a change of control and ratings are cut to junk.

Tyco Withdraws

About 55 percent of investment-grade bonds whose restrictions were assessed by Moody's in the first half of the year included the provision.

While yield premiums on investment-grade debt have widened, they are still 1.42 percentage points below their high of 2.72 percentage points in October 2002, Merrill Lynch data show. A decline in benchmark 10-year U.S. Treasury yields to 4.71 percent, the lowest since May, from 5.32 percent in June has helped offset the higher premiums demanded by investors.

Tyco Electronics Ltd. found out two weeks ago how demanding investors have become. The Berwyn, Pennsylvania-based maker of electronic connectors scrapped a $1.5 billion bond sale rather than agree to pay more in interest if its credit ratings fell. Tyco is rated Baa2 by Moody's and BBB by S&P.

Sheri Woodruff, a Tyco spokeswoman, declined to comment.

Deteriorating Mix

Kimberly-Clark Corp., the Dallas-based maker of Huggies diapers and Kleenex tissues, also refused to include a step-up provision. Instead, it paid yields 10 basis points to 15 basis points higher on $2.1 billion of three-, 10- and 30-year bonds than it would have paid otherwise, analysts estimate. Kimberly- Clark is rated A2 by Moody's and A+ by S&P. A basis point is 0.01 percentage point.

``Investors are concerned about the amount of risk they are taking on,'' said Mark Buthman, Kimberly-Clark's chief financial officer. A step-up provision was ``not one we were willing to provide,'' Buthman said. The bonds include a poison put.

S&P said on Aug. 1 that for the first time more than half of the borrowers it rates are ranked below investment grade. Forty-five investment grade companies are at risk of being cut to junk, Merrill Lynch said in an Aug. 6 report. That compares with 20 high-yield issuers considered likely to be upgraded to investment grade.

``The ratings mix continues to deteriorate as firms borrow to buy back shares and make acquisitions,'' New York-based S&P analyst Diane Vazza said in the report.

Willis Group

Expedia Inc., the Internet travel agency run by Chairman Barry Diller, reduced its planned share buyback by 79 percent on July 23 because it couldn't get enough financing. The Bellevue, Washington-based company had planned to repurchase 116.7 million shares and said its debt might increase eightfold as a result. Moody's downgraded Expedia's credit rating to junk on July 24, even though it reduced its buyback.

London-based Willis Group Holdings Ltd., the world's third- largest insurance broker, included a coupon step-up in one of its bond sales for the first time on March 23. It offered $600 million of 10-year notes with the provision, Bloomberg data show.

The company must boost the 6.2 percent coupon by 25 basis points for each rating cut by S&P or Moody's below investment grade, with a cap at 200 points. Ratings upgrades cause the coupon to decrease by 25 basis points to as low as 6.2 percent. Willis is rated BBB by S&P and Baa2 by Moody's.

``It was something that investors requested, and we wanted to be responsive,'' Valerie Di Maria, spokeswoman for Willis Group, said. ``It helped our pricing, and everybody seemed to be happy.''

TXU, Kimco

TXU, which is being acquired by New York-based private- equity firms Kohlberg Kravis Roberts & Co. and TPG Inc., raised $1.8 billion on March 13 by offering floating-rate notes with a step-up, also its first.

Lisa Singleton, a spokeswoman for TXU, couldn't be immediately reached for comment.

Kimco sold $300 million of 10-year notes with a coupon step-up for the first time on April 23, Bloomberg data show. The New Hyde Park, New York-based developer must boost the 5.7 percent coupon by 25 basis points for each rating cut by S&P or Moody's below investment grade, with a cap at 200 basis points. Ratings upgrades cause the coupon to decrease by 25 basis points.

Kimco is rated Baa1 by Moody's and A- by S&P. Barbara Pooley, a Kimco spokeswoman, didn't immediately return a call for comment.

AT&T Bonds

Poison puts became popular when LBOs increased in the 1980s. Ten years later, demand increased for step-up bonds as telecommunications companies began piling on debt to pay for acquisitions and licenses to provide high-speed internet services over mobile phones.

AT&T Corp., now part of San Antonio-based AT&T Inc., became one of the biggest U.S. companies to use a coupon step-up when it issued $8.25 billion of bonds in 2001 and 2002, Bloomberg data show.

The company's credit ratings fell below investment grade in August 2004, triggering the step-up provision that increased the bonds' coupon by half a percentage point. AT&T's annual interest payments at the time rose about $65 million.

To contact the reporter on this story: Bryan Keogh in New York at bkeogh4@bloomberg.net

Last Updated: August 7, 2007 04:22 EDT