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. Their resistance has increased borrowing costs and will bring an end to lax financing standards, Gross said. An index that tracks the risk of below- investment grade companies has fallen this month as losses from subprime mortgages mount, increasing the implied cost of protecting high-yield bonds to the highest since May 2005.

Money managers had snapped up 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 wrote. ```Here, take this' their investment banker jailers seemed to say, `and be glad that you've got at least something to eat!'''

Market Backed Up

A growing lack of confidence has ``frozen'' future lending and potential investors, backing up the market for high-yield new issues so that ``absolutely nothing is moving,'' wrote Gross, whose Pimco Total Return Fund returned 0.85 percent this year, underperforming its benchmark, the Lehman Brothers Aggregate Bond Index, by 0.48 percent, according to data compiled by Bloomberg.

``They're 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.''

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 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. It didn't adjust the rate on a $2 billion revolving credit line.

Higher Risk Premiums

Losses on U.S. mortgage securities are prompting investors to demand higher risk premiums on debt sold by buyout firms. At least 35 bond and loan transactions worldwide were canceled or restructured in the past five weeks.

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. Allison also plans to sell $1.1 billion of unsecured notes at a later date, LCD said.

The extra interest investors demand to own junk-rated debt rather than Treasuries of similar maturity has widened 103 basis points to 344 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 American High-Yield Index of 100 companies with non-investment grade ratings fell as much as 0.5 to 92.75, according to broker Phoenix Partners Group. That implies the cost to protect $10 million of the bonds climbed to as high as $488,000.

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

Last Updated: July 24, 2007 15:16 EDT