Regulators, markets challenge Manor Care buyout

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 amid sour markets and regulatory delays.

The deal has drawn organized protests from consumer 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 union's request.

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

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 its "merger" with a Carlyle unit by Nov. 7. On Nov. 8, the company 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, have since dropped to $62 per share.

The West Virginia hearing -- scheduled to begin on Friday morning -- 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."

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."

Dealmakers have also had to negotiate terms under worsening circumstances across global credit markets whose liquidity has evaporated in the face of continuing losses in U.S. residential mortgage securities and their derivatives. 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 on CMBS are shying away from health care-related issues whose volatile nature adds risk at a time when they want less, analysts said.

"It's 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. (Editing by Leslie Adler)