(Corrects yield spread in 16th paragraph of story published July 24.)

July 24 (Bloomberg) -- The cheap financing that fueled the leveraged buyout boom is over, according to Bill Gross, manager of the world's largest bond fund.

``The tide appears to be going out for levered equity financiers and in for the passive owl money managers of the debt market,'' Gross, chief investment officer at Pacific Investment Management Co. in Newport Beach, California, wrote today in his monthly commentary on Pimco's Web site. The shift ``promises to have severe ramifications for those caught in its wake.''

Gross's comments come as investors balk at buying the riskiest bond offerings. At least 35 debt transactions were canceled or restructured worldwide in the past five weeks amid concerns that a slump in securities backed by subprime mortgages may spread across the credit markets.

A growing lack of confidence has ``frozen'' lenders, backing up the market for high-yield new issues so that ``absolutely nothing is moving,'' Gross wrote in his commentary. Investor resistance has increased borrowing costs and will bring an end to lax financing standards, he said.

Moody's Investors Service and Standard & Poor's this month cut credit ratings on billions of dollars of bonds backed by subprime mortgages, on expectations home-loan defaults will rise. In his last commentary in June, Gross criticized the New York-based rating services, saying they were duped by the makeup and ``hooker heels'' of bundled securities with investment-grade ratings.

Investors are ``frozen because they don't trust the ratings,'' Gross said in an interview today. ``It's a subprime- to-corporate debt type of phenomena that's freezing buyers and making for an extreme backup in terms of supply.''

`Daily Gruel'

In his latest outlook, Gross said money managers accepted bonds and loans from LBOs sponsored by private-equity firms such as Blackstone Group LP and Kohlberg Kravis Roberts & Co., both of New York, ``as if they were prisoners in an isolation ward looking forward to their daily gruel passed unemotionally three times a day through the cellblock window.''

Gross's $102 billion Pimco Total Return Fund returned to its holders 0.85 percent this year, underperforming its benchmark index, the Lehman Brothers Aggregate Bond Index, by about half of a percentage point, according to data compiled by Bloomberg. The Dow Jones Industrial Average, which fell the most in four months today, is up 10 percent this year.

Gross said in October that slowing U.S. growth would prompt the Fed to lower rates in the first half of this year. The Fed has kept the benchmark rate at 5.25 percent since June 2006.

Higher Risk Premiums

Losses on U.S. mortgage securities are prompting investors to demand higher risk premiums on debt sold by buyout firms.

Carlyle Group, based in Washington, is offering higher interest on 1.18 billion euros ($1.6 billion) of loans to finance the buyout of Zodiac SA's marine unit, according to a person with direct knowledge of the deal.

Allison Transmission, a General Motors Corp. unit that makes automatic transmissions for trucks and buses, on July 23 postponed its $3.5 billion sale of loans that it plans to use to fund its buyout by Carlyle Group, according to S&P's Leveraged Commentary & Data.

Investors are watching large financings such as that by Chrysler, the carmaker being sold by Germany's DaimlerChrysler AG, to determine what the new pricing levels of debt should be, Gross wrote.

Chrysler Boost

Chrysler last week boosted the interest rates it's willing to pay investors to take on $18 billion of loans to finance its takeover by Cerberus Capital Management LP.

``Certainly the deals that were believed to be done are going to be financed at higher spreads and higher costs,'' Gross said in today's interview.

The extra interest investors demand to own junk-rated debt rather than Treasuries of similar maturity has widened 120 basis points to 361 basis points since touching the lowest on record on June 5, according to Merrill Lynch & Co. index data. A basis point is 0.01 percentage point.

The CDX North America High-Yield Index of 100 companies with non-investment grade ratings dropped as much as 0.5 to 92.75 earlier today, according to broker Phoenix Partners Group. That implies the cost to protect $10 million of the bonds was at $488,000, the most since 2005. The index was trading at about 93.06 as of 5:13 p.m. in New York, implying a cost of about $465,000.

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

Last Updated: July 25, 2007 08:25 EDT