CREDIT WRAPUP 5-LBOs still to finance, mortgage market struggles

(Recasts with U.S. developments)

By Burton Frierson and Mike Peacock

NEW YORK/LONDON, Sept 4 (Reuters) - As investors returned from summer vacations after the worst credit squeeze in a decade, the focus on Tuesday turned to the financing of more than $300 billion of announced leveraged buyout deals.

However, U.S. mortgage markets continued to provide reasons for investor concern, despite moves by U.S. President Bush last Friday to provide assistance for less creditworthy borrowers, and assurances from Federal Reserve chairman Bernanke that the Fed stands ready to provide further liquidity.

Financial markets continued to expect the Fed will cut its fed funds rate from 5.25 percent at its next policy meeting on September 18th, though the U.S. manufacturing sector continued to expand in August, according to data from the Institute or Supply Management on Tuesday.

But the first major test of the return of liquidity and creditworthiness may well be the financing of the $26 billion leveraged buyout of First Data Corp FDC.N by private equity group, Kohlberg Kravis Roberts & Co.

The financing, expected to close later this month, is being closely watched across Wall Street as a litmus test for the more than $300 billion of leveraged buyout (LBO) debt clogging the balance sheets of such banking giants as Citigroup (C.N: Quote, Profile, Research, Stock Buzz), JPMorgan (JPM.N: Quote, Profile, Research, Stock Buzz), Goldman Sachs (GS.N: Quote, Profile, Research, Stock Buzz) and Lehman Brothers LEH.N.

"What I hear is that (First Data lenders) are going to try to place larger chunks of maybe $500 million to a billion with a few select large institutional investors rather than putting it out to broad distribution that would cause a lot of turmoil in market," said Nuveen Investments analyst Manny Labrinos.

Other deals waiting for financing are the $32 billion buyout of Texas utility TXU Corp TXU.N. and the $25 billion purchase of student loan company Sallie Mae (SLM.N: Quote, Profile, Research, Stock Buzz).