The collapse of the high-risk mortgage market continued to send shockwaves across the American economy yesterday as the buyout firms Kohlberg Kravis Roberts (KKR) and Clayton, Dubilier & Rice were forced to pull a key debt offering to finance a recent takeover.

The $1.55 billion (£775 million) bond offering, to help to fund the leveraged acquisition of US Foodservice, America’s second-largest food distributor, was pulled as the sub-prime mortgage crisis made investors nervous about backing high-risk propositions such as buyouts. Meanwhile, plans to sell an additional $2 billion of loans in US Foodservice were put on ice.

The failed debt raisings will not directly affect KKR and Clayton, Dubilier & Rice, US Foodservice’s new owners, because the deal’s underwriters, such as Deutsche Bank, Citigroup and JPMorgan, agreed to provide “bridge” financing until the debt can be raised from elsewhere. Yet it provides the clearest sign so far that the easy credit that private equity firms have enjoyed in recent years is coming to an end and it will make banks wary about agreeing to bridge financing in the future.

The failure comes after Thomson Learning, a former division of the media giant Thomson, scaled down the bond offering with which its new private equity owners, Apax Partners and the Ontario employees’ pension fund, had planned to help to finance their takeover from $2.14 billion to $1.6 billion.

The increasing difficulty of raising finance is the third stage of the fallout from the decline in the US housing market. In the first stage, key lenders of sub-prime mortgages, such as New Century and ResMae, were forced into bankruptcy. In the second, hedge funds with a large exposure to sub-prime mortgage bonds, such as Bear Stearns’s High Grade Structured Credit Strategies fund, suffered huge losses. The losses on these highly leveraged funds hit their lenders.

Yesterday Bear Stearns drafted in Thomas Marano, its top mortgage trader, to lead its attempt to rescue its High Grade Structured Credit Strategies fund. Mr Marano, the 45-year-old global head of mortgages and asset-backed securities, is charged with safeguarding the $1.6 billion that Bear Stearns has agreed to inject into the fund as it tries to keep it afloat. The bank previously had pledged $3.2 billion but it halved this after selling a portion of the fund’s assets.

Mr Marano is expected to liaise with the US Securities and Exchange Commission, which is investigating how two Bear Stearns hedge funds, including the one he is now overseeing, came to lose so much money so quickly. The inquiry is part of a broader investigation into the way that banks and other institutions value their holdings of sub-prime mortgage-backed securities. It could lead to widespread devaluations and a further loss of investor confidence in this kind of financial instrument.

This week Queen’s Walk, the investment firm, became the first British company publicly to quantify the impact of America’s sub-prime crisis on its business. It reported that defaults on US sub-prime home loans, added to UK borrowers paying off loans sooner than expected, led it to mark down the value of its assets by 25 per cent to €214.9 million, as of March 31.

Pressure is on

–– Private equity wants to raise $250 billion to finance deals in coming months
–– Cerberus will look to raise up to $62 billion to help to fund its takeover of Chrysler
–– Barclays Capital has lent about $300 million to Bear Stearns’s High Grade Structured Credit Strategies fund, which is near collapse
–– Bear Stearns has another hedge fund highly exposed to sub-prime mortgages, its Enhanced Leverage Fund. This has $600 million of equity and $6 billion of borrowings and lost 18 per cent of its value in April
–– Queen’s Walk, a British investment firm, has written assets down 25 per cent

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