LBO Credit Quality Falls to Lowest in Nine Months (Update2) By Kabir Chibber July 11 (Bloomberg) -- Loans used to finance leveraged buyouts are the riskiest in at least nine months on speculation that losses on subprime mortgage securities will spread to other markets, according to traders of credit-default swaps. The iTraxx LevX Index of credit-default swaps on loans to 35 European companies fell as much as 1 percent to the lowest since the index started last October, according to Deutsche Bank AG prices. The LCDX index of loans to 100 U.S. companies dropped as much as 0.57 percent to 96, Phoenix Partners Group in New York said. Concerns that buyout firms will find it increasingly expensive and face tougher restrictions, or covenants, to finance deals spilled over to the stock market. Shares of DaimlerChrysler AG, the world's second-largest maker of luxury cars, declined on speculation New York-based Cerberus Capital Management LP will cancel its acquisition of Chrysler. Thomas Froehlich, a spokesman for the Stuttgart, Germany-based company, said there is ``no indication of a delay from our side.'' ``If the problems in the mortgage market continue, you will see liquidity conditions and bank lending get stricter,'' Willem Sels, head of credit strategy at Dresdner Kleinwort in London, said in an interview. ``Because we have seen stresses in the mortgage market, people are asking if the same thing could happen in the loans market.'' Shares in DaimlerChrysler fell as much as 3.5 percent to 66.06 euros in Frankfurt today, and closed at 67.43 euros. The carmaker said in May that it will sell 80.1 percent of Chrysler to private-equity firm Cerberus, which is seeking $20 billion in loans to fund the takeover. Deals Postponed Private-equity firms need to sell $300 billion of bonds and loans to finance LBOs, according to Bear Stearns Cos. in New York. More than a dozen companies were forced to postpone or restructure debt sales in the past three weeks. Kohlberg Kravis Roberts & Co., based in New York, last week offered lenders a discount and added restrictions on its debt to borrow $1.4 billion for Amsterdam-based home-improvement retailer Maxeda BV. U.S. high-yield loan prices fell to a four-year low yesterday, with covenant-lite loans losing the most, according to Standard & Poor's LCD unit. Loan rates for companies ranked four or five levels below investment grade increased to an average 2.52 percentage points above benchmark interbank rates from an all-time low of 2.12 percentage points in February, according to S&P's LCD. ``You have the subprime bubble, which is partially bursting, and concern over the large glut of covenant-lite loans,'' said Gunnar Stangl, head of index and bond strategy at Dresdner Kleinwort in London. Interest Margins Buyout firms typically raise two-thirds of the acquisition price by borrowing and then use the target company's cash flow to repay lenders, causing a deterioration in credit ratings. Credit-default swaps are financial instruments based on bonds or loans that are used to speculate on a company's ability to repay debt. The LevX index, which includes contracts on companies owned by buyout firms from Blackstone Group LP in New York to London- based Apax Partners Worldwide LLC, reached a high of 101.53 in February and traded at 98.76 yesterday. The index fell to as little as 97.5 today and traded at 97.75 at 3:30 p.m. in London. Trading in loan credit-default swaps averages about 400 million euros ($544 million) a day on the 32 companies in the LevX index, Morgan Stanley said in May. The LCDX in the U.S. has fallen 4.3 percent from 100.63 since it started trading on May 22. The iTraxx Crossover Series 7 Index of default swaps on corporate bonds showed European corporate bonds are the riskiest in at least three years today.