Sept. 27 (Bloomberg) -- Kohlberg Kravis Roberts & Co.'s banks are selling as much as $10 billion of loans used for the buyout of First Data Corp. in the biggest offering of high-yield debt since corporate funding dried up in July.

Buyers are starting to return to the market after record mortgage foreclosures prompted investors to shun all but the safest debt. Underwriters led by Citigroup Inc. and Credit Suisse Group had to offer a 3 to 4 percent discount to sell the First Data loans, and are still left hold as much as $14 billion more of the Greenwood Village, Colorado-based company's debt.

``It's a significant event on the road back to normality,'' said John Pattullo, who manages about $2 billion of mainly high- yield bonds and loans at Henderson Global Investors in London. ``It shows that investors at least will accept a market clearing price and that wasn't the case a month ago.''

Banks for First Data, the biggest processor of credit-card payments, had cut the loan sale to $5 billion from $14 billion earlier this month because of a lack of demand. The six banks will issue as much as $8 billion of the debt at a discount of 4 percent of face value, said two people with knowledge of the deal. A further $2 billion will be sold at a 3 percent cut, said the people, who declined to be identified because details of the sale are private.

Underwriters sold more than $7 billion of leveraged loans in the U.S. in the last two weeks, reducing their backlog of postponed debt offerings to about $370 billion, according to Bank of America Corp.

`Less Panic'

``It's a virtuous cycle,'' said Raja Visweswaran, Bank of America's head of European credit strategy in London. ``The more deals that clear the market, the more confidence from investors and less panic from deal arrangers.''

Leveraged buyouts, which were at a record $613 billion in the first half of the year, slowed to $167.4 billion since then as banks stopped financing new deals, Bloomberg data show. Sales of U.S. leveraged loans declined to a total $12 billion so far this month from more than $50 billion in June, according to Standard & Poor's.

The European Central Bank in Frankfurt lent 3.9 billion euros ($5.5 billion), the most in almost three years, at its penalty rate today, indicating the fallout from the subprime slump is still making banks reluctant to lend to each other.

The LCDX index, a benchmark indicator for the U.S. leveraged loan market, shows confidence has improved from the low in July. The index has risen 8.2 percent to 97.4 from 90 on July 30, and climbed 0.05 today, according to Goldman Sachs Group Inc.

Alliance Boots

First Data's loans pay annual interest of 2.75 percentage points over the London interbank offered rate, unchanged since the deal was announced in July. With a 4 percent price discount, that raises the yield to about 4.3 percentage points more than Libor, according to data compiled by Bloomberg.

HSBC Holdings Plc, one of the First Data underwriters, will keep about $2 billion of the loans until the end of the year, with an option to sell at 98 cents on the dollar or more, the Financial Times reported today, without saying how it got the information. HSBC spokesman Donal McCarthy in New York declined to comment.

New York-based KKR, run by Henry Kravis and George Roberts, agreed to buy First Data in April, before the subprime mortgage rout caused the collapse of collateralized debt obligations that buy leveraged loans. CDO sales fell to the lowest in more than a year in August to about $16 billion, down from $157 billion in March, the most active month of this year, JPMorgan Chase & Co. analysts said in a Sept. 10 report.

Banks underwriting the financing for LBOs commit to raise the money and earn fees to compensate for the risk of having to take on any debt they can't sell to a wider group of investors. They have to mark down the value of the debt and assume a loss if the price of high-yield loans falls below 100 percent.

Another KKR deal, the 9 billion-pound ($18 billion) financing for the acquisition of U.K. pharmacy chain Alliance Boots, has languished on underwriters' books since July.

To contact the reporters on this story: Cecile Gutscher in London at cgutscher@bloomberg.net.

Last Updated: September 27, 2007 13:14 EDT