Jan. 3 (Bloomberg) -- For investors stung by $28 billion of losses on high-yield, high-risk loans, it's payback time.

Creditors are making borrowers from Carlyle Group's LifeCare Holdings Inc. to casino owner Tropicana Entertainment LLC increase the interest on their debt by an average 0.83 percentage point to change the terms of their loans, the highest price since at least 1997, according to data compiled by Standard & Poor's in New York. The penalties are four times higher than six months ago, S&P said.

A total of 179 North American companies have a high risk of default or may need to change details of their debt agreements, Moody's Investors Service said. Lenders are taking advantage of the distress to recoup losses after the collapse of the subprime mortgage market caused $551 billion of so-called leveraged loans tracked by S&P to fall below 95 cents on the dollar, from 100 cents before June.

``There's been a dramatic shift in negotiating leverage from borrowers to debt holders,'' said Scott D'Orsi, who helps manage $1.4 billion in loans as a partner at Boston-based Feingold O'Keeffe Capital. ``We will see more of this with companies that are susceptible to a slower economy.''

Creditors are also demanding fees of as much as 0.35 percentage point of the value of loans to relax terms, or covenants, such as the minimum ratio of earnings to debt they require or deadlines for reporting quarterly financial results, S&P said. Before June, lenders charged 0.125 percentage point.

A 0.35 percentage point penalty and an increase of 0.83 percentage point in rates would cost a borrower $5.9 million in the first year on a $500 million loan.

Higher Rates

Carlyle, the Washington-based private-equity firm led by David Rubenstein, bought LifeCare, the third-largest long-term health-care operator in the U.S., for $555 million in August 2005. The firm invested an additional $6 million in November after the Plano, Texas-based company broke a covenant limiting debt to less than 8.5 times earnings before interest, tax, depreciation and amortization, or Ebitda.

LifeCare asked banks to change the loan terms to allow Carlyle to invest more money in November, according to filings with the U.S. Securities and Exchange Commission. They demanded a $2 million payment and raised the interest rate on $250 million of loans by 1 percentage point to 4.25 percentage points more than the London interbank offered rate. The increased interest will cost LifeCare an extra $2.5 million a year. Libor, a borrowing benchmark, is 4.68 percent.

Loan Value Drops

The company's term loan trades at about 88 cents on the dollar, compared with 93 cents two months ago, according to London-based data provider Markit Group Ltd. LifeCare's $150 million of 9.25 percent notes due in 2013 have fallen to 66 cents on the dollar from 74.5 cents on Oct. 31. The yield rose to 19.4 percent from 16.2 percent, according to Trace, the bond reporting system of the Financial Industry Regulatory Authority.

LifeCare's chief financial officer, Phillip Douglas, didn't return calls for comment.

Tropicana borrowed $3.1 billion a year ago to help fund the takeover of its parent Aztar Corp. by closely held Fort Mitchell, Kentucky-based hotel owner Columbia Sussex Corp.

Chief Executive Officer William Yung promised lenders the company would retain its casino licenses. The New Jersey Casino Control Commission revoked Tropicana's gaming permit last month, citing ``lack of business ability, a lack of financial responsibility and a lack of good character, honesty and integrity.''

Forced Sales

Tropicana's lenders agreed on Dec. 21 to delay a declaration of default on $1.34 billion of loans in return for a $7 million payment and a 3.6 percentage point increase in the interest rate to 10.5 percent, costing about $48 million more a year, regulatory filings show. The company also pledged to sell the Tropicana in New Jersey and casinos in Indiana and Mississippi to repay the debt.

Tropicana's loan rose to 100 cents on the dollar from 93 cents after the amendment, according to S&P. By contrast, Tropicana's $960 million of 9.63 percent notes due in 2014 fell 3 cents to 63.75 cents, and the yield rose to 19.3 percent from 18 percent, according to Trace.

``It was a bad time'' to be seeking a waiver, said Derek Haught, vice president of finance at Columbia Sussex. ``There was pushback from lenders.''

`Understanding' Banks

Companies rated below-investment grade, or less than Baa3 by Moody's and BBB- by S&P, had no trouble raising money through June. Banks led by New York-based JPMorgan Chase & Co., Citigroup Inc., and Bank of America Corp. in Charlotte, North Carolina, arranged $620 billion of leveraged loans in the first six months of 2007, up from $341 billion in the same period of 2006, data compiled by Bloomberg show.

Most was sold to hedge funds and collateralized debt obligations, which packaged the loans into securities and sold them to investors. Rates on loans ranked BB fell to a record low 1.6 percentage points over Libor in February, S&P said.

``Banks were understanding and very easy to deal with,'' said Cary Levinson, co-chairman of Philadelphia-based law firm Pepper Hamilton LLP's commercial practice, which represents private-equity firms.

Almost $100 billion, or 29 percent, of bank debt that financed leveraged buyouts in the first half were so-called covenant-lite loans, according to S&P. They typically don't limit the amount of debt a company can have relative to earnings, or prohibit asset sales.

Subprime Losses

Demand dried up in July when losses on securities tied to subprime mortgages spread at the same time banks promised $230 billion for acquisitions. Sales of collateralized loan obligations, a type of CDO, tumbled to $67.7 billion in the second half from $127 billion in the first, according to data from JPMorgan.

Loan prices fell 4 percent in July, the biggest drop on record, and now trade at an average of 94.6 cents on the dollar, the lowest since October 2003, according to S&P.

Some investors are buying the debt to wrest higher interest payments. Money managers set up $33.1 billion in distressed debt funds in 2007 versus $12.7 billion last year, according to Private Equity Intelligence Ltd., a London-based research firm.

``Rather than traditional bank lenders that would say: `You need an amendment and here's a reasonable price,' these guys are looking at this as an investment opportunity to extract a premium,'' said David Feldman, a partner with New York law firm Kramer Levin Naftalis & Frankel LLP.

Slowing Economy

Borrowers are finding it harder to meet their agreements as the economy slows, according to Moody's in New York. The U.S. probably grew at an annual pace of 1 percent in the fourth quarter, from 4.9 percent in the third, according to the median estimate of 63 economists surveyed by Bloomberg. The Federal Reserve forecasts the economy will expand 1.8 percent to 2.5 percent this year, down from a previous estimate of 2.5 percent to 2.75 percent.

A total of 39 companies have the lowest liquidity ratings, meaning their financing is ``highly uncertain,'' up from 22 in June, Moody's said. Another 140 may require amendments to ``maintain orderly access to funding,'' the firm said.

Quebecor World Inc., the second-largest printing company in North America, has ``poor liquidity,'' Moody's said. The company is in talks to renegotiate its loans after Ebitda dropped 17 percent to $126 million in the third quarter.

The Montreal-based company's lenders this week granted Quebecor a waiver until March 31, freeing the company from complying with a covenant limiting debt to 4.5 times Ebitda. The ratio was 4.6 times as of Sept. 30, according to a Nov. 8 regulatory filing.

CEO Steps Down

CEO Wes Lucas stepped down in December after the company canceled the sale of its European business and scrapped a refinancing plan. Quebecor's $450 million of 8.75 percent notes due in 2016 fell to 73 cents on the dollar from 90 cents six weeks ago, for a yield of 14.4 percent, according to Trace. The company's loan doesn't trade, Markit said.

Credit-default swap investors are demanding 25 percent upfront and 5 percent a year to protect Quebecor bonds from default for five years, according to CMA Datavision in London. That's up from 22.5 percent upfront and 5 percent a year on Dec. 31. The derivatives, used to speculate on the company's ability to repay its debt or to hedge against losses, trade on upfront prices when investors see a high risk of default. The price means it would cost $2.5 million initially and $500,000 a year to protect $10 million in Quebecor debt for five years.

Tony Ross, a spokesman for Quebecor, didn't return calls.

US Oncology

US Oncology Holdings Inc., the Houston-based manager of cancer-treatment and research centers bought by Welsh, Carson, Anderson & Stowe in 2004, renegotiated its loan in December after a $4.2 million loss in the third quarter.

The company said in a Nov. 9 regulatory filing that it may breach a covenant limiting debt to five times Ebitda. The ratio was 4.8 times on Sept. 30. US Oncology paid lenders $1.6 million and increased the rate on $472 million of loans by 0.5 percentage point to Libor plus 2.75 percentage points, according to a Dec. 4 filing.

US Oncology's loan is quoted at 98 cents on the dollar, down from 99 cents two months ago, according to Markit. Its $272.8 million of 10.75 notes due in 2014 dropped to 99 cents from 105 cents two months ago, driving the yield to 10.96 percent from 8.4 percent, according to Trace.

``Anytime you need to go a bank it's a problem right now,'' said Jonathan Rather, general partner and chief financial officer of Welsh, Carson in New York. ``Banks are going to extract some flesh. They have to.''

To contact the reporter on this story: Pierre Paulden in New York at ppaulden@bloomberg.net

Last Updated: January 3, 2008 08:57 EST