Will Credit Risk Weigh Down Debt Markets? (2/2)

American markets are not the only ones in which banks are having trouble selling bonds. American private equity company Kohlberg Kravis Roberts hoped to raise over ten billion dollars in bonds. This was part of a deal to buy Alliance Boots, a European company that sells medicines. But a group of banks had to postpone the sale because of a lack of buyers.

Conditions for big deals by private equity companies appear to be cooling. Private equity companies depend on liquid debt markets to lend them money. And investors are less willing to put money into debt securities.

Part of this is the flight from risk involving investments based on subprime home loans. These loans carry lower than average credit quality but also pay higher interest rates. Credit rating agencies are now recognizing that investments based on subprime home loans are riskier than investors have thought.

Too many high-risk loans were blamed for the failure of the nation's second largest subprime lender. New Century sought bankruptcy protection from its creditors in April. Investor flight from risk means that debt market liquidity could dry up as interest rates rise. But it is too early to tell.