UPDATE 1-Regulators, markets challenge Manor Care buyout

(Recasts; adds share price, hearing details)

By Al Yoon and Jonathan Keehner

NEW YORK Dec 14 (Reuters) - Key funding for Carlyle Group's $6.3 billion leveraged buyout of U.S. nursing home giant Manor Care Inc. HCR.N has been pushed to the first quarter of 2008, delayed from initial investor expectations amid sour markets and regulatory delays.

The deal has drawn organized protests from consumer and labor groups fearing that pressure for greater profits will worsen care for senior citizens and conditions for employees. In West Virginia, a state authority on Friday will reconsider its prior approval of the deal after a request from a union.

"The hope is that the Health Care Authority will reexamine the terms of this deal," said Sherri McKinney of the Service Employees International Union, which requested the review.

Manor Care has seven facilities in West Virginia, according to the company, and does not intend to close the buyout without approval from all states where it operates, a spokesman said.

In addition to regulatory woes, the credit crunch born from bad U.S. residential loans has taken a bite out of demand for commercial mortgage-backed securities, which will be used to raise $4.6 billion for the Manor Care buyout.

The issue, which some investors expected this quarter, should now be done by March, according to an investor briefed by lead underwriter JPMorgan Chase & Co.

A spokesman for the bank declined to comment on the offering.

In an October filing, Manor Care had said that it hoped to close the deal with Carlyle by Nov. 7. But the company on Nov. 8 said it was still working toward a "timely" closing, subject to regulatory consents and approvals.

Shares of Toledo, Ohio-based Manor Care, which were trading just below Carlyle's $67 offering price in early November, dropped as low as $61.44 this week. The stock rose 1.9 percent on Friday to $63.19.

During the hearing, a union representative asserted that that private equity control of nursing homes has been detrimental to the quality of care. But those concerns were assailed during questioning, including how the union supported its claims.

The West Virginia hearing on Friday is "very abnormal," Manor Care spokesman Rick Rump told Reuters.

"The fact that they stayed their decision is unprecedented in West Virginia," said Rump. "It's political. The union asked for this and we feel they've bowed to some pressure."

Licenses needed to be transferred in 32 states, Rump said. "We don't want to close without doing that."

MARKET JITTERS

Equity investors have been spooked by a market that has seen the recent collapse of several deals, including the $25 billion buyout of student lender Sallie Mae SLM.N and the $4 billion takeover of equipment rental company United Rentals Inc (URI.N).

"Frankly, all buyouts are dangerous," said one arbitrage trader. "Manor Care is one of the safer ones because of its stable cash flows, but you can't ignore the turmoil being caused by politicians."

Banks committed to the financing must also negotiate terms under worsening conditions across global credit markets, where liquidity has evaporated in the face of continuing losses in U.S. residential mortgage securities. Year-end funding pressures as banks shore up balance sheets with only cash and other ultra-liquid assets are also headwinds for debt sales.

What's more, investors still sanguine about CMBS are shying away from health-care-related issues, whose volatile nature adds risk at a time when they want less, analysts said.

"It has been volatile, so trying to get people to focus on pricing a new deal is problematic" for any issuer, said Kevin Cronin, chief investment officer at Boston-based Putnam Investments, which manages $185 billion.

Manor Care in November had raised about $1 billion of the $1.6 billion "mezzanine" portion of the CMBS, according to Reuters Loan Pricing Corp. (Reporting by Al Yoon and Jonathan Keehner; editing by Gary Crosse)