Oct. 9 (Bloomberg) -- Buyout firms such as Kohlberg Kravis Roberts & Co. may have to wait until the second half of next year to fund acquisitions bigger than $4 billion in Asia, as banks pare new loans to recover from subprime losses, bankers said.

Investment banks are demanding tougher terms on debt to fund LBOs, said bankers attending a leveraged finance conference in Hong Kong yesterday.

``There is a lot more focus on fundamentals and the credit approval process has become more stringent,'' Farhan Faruqui, head of Citigroup Inc.'s Asia-Pacific loans business,.

Citigroup, JPMorgan Chase & Co. and other banks are offering discounts of as much as 4 percent in the U.S. and Europe to clear about $300 billion of leveraged-buyout financing they promised before losses on subprime mortgages shut down the market for high-risk high-yield debt in July. Write-offs by investment banks on soured leveraged-buyout loans and bonds may total $25 billion, according to estimates by Citigroup analysts.

Acquisitions needing more than $3 billion of debt will have to tap the U.S. and European markets, where fund-raising by collateralized loan obligations and collateralized debt obligations has seized up, according to Michael Tierney, head of Asia-Pacific leveraged finance for Credit Suisse Group.

Market Recovery

The markets for CDOs and CLOs ``have disappeared and they're not coming back maybe until the middle of next year,'' said Tierney, who is based in Melbourne. ``The second half of next year is when we should see an up-pick in the market, when large Asian deals may have a chance of getting done.''

Buyout firms have completed $2.5 billion of acquisitions in Asia since July, compared with $6.5 billion in the same period of 2006, according to data compiled by Bloomberg. Tighter credit markets, shareholder resistance and higher valuations are also hampering their ability to close deals, bankers said.

CLOs and CDOs had been major buyers of leveraged-finance debt, packaging loans and bonds and using their income to pay investors.

Buyout firms typically acquire companies using the target assets to borrow at least two-thirds of the purchase price to boost the returns of their funds.

Corporate buyers bidding for assets will give private equity firms stiff competition as LBO debt becomes more expensive while the cost of acquisitions rises, fueled by the record-high stock markets in the region, said the bankers. Private equity partners for Wesfarmers Ltd.'s bid to buy Australia's Coles Group Ltd., walked away from the deal in June because they were concerned over the rising cost of LBO debt.

`All-Time Highs'

``Many stock markets in Asia are at all-time highs and the valuation request from the sell side is really difficult to meet,'' said Hong Kong-based Aaron Chow, head UBS AG's Asia syndicated finance. Buyout firms will need to increase access to subordinated debt or hybrid debt that is linked to the asset's equity, to help boost its purchase power, Chow said.

Corporate buyers are able to raise more debt then buyout firms for leveraged buyouts because they are supported by larger asset bases and the ability to add value to the acquisitions using existing businesses, according to Peter Szekely, an executive director at Morgan Stanley, and Juhi Prasad, head of Asia leveraged finance at Lehman Brothers Holdings Inc.

`Very Challenged'

The amount of debt banks are willing to provide for leveraged buyouts has been reduced by about one to two times the asset's cash flows, said Alan Hirakawa, head of Asia-Pacific leveraged finance at Barclays Capital. Interest costs on senior loans are 3 percentage points above benchmark lending rates for Asian deals, from 2.25 percentage points in the first half of this year, he said.

``In the current environment, large transactions which involve large international debt placements are very challenged,'' Carlyle Group's Sydney-based managing director Simon Moore said on Oct. 2. In the short term, large-size acquisitions in Australia ``are probably off the table for the moment,'' he said.

As the influence of private equity fades, companies are under less pressure to use cash flows to buy back shares or acquire other companies to fend off buyout bids, Citigroup analysts led by London-based Darren Brooks said in a research note on Oct. 4.

To contact the reporter for this story: Patricia Kuo in Hong Kong at pkuo2@bloomberg.net.

Last Updated: October 8, 2007 23:29 EDT