Is the easy credit party over? From euphoria and record deal levels just a few months ago, the corporate loan and bond markets are suffering something like a whopping hangover. The days of "covenant-lite" have ended as investors are shunning riskier loans and demanding tougher terms.

• Author: Sweeney, Paul
• Position: Cover story

Call it "back to the future" for the corporate debt market. After a year in which borrowers were typically accorded the red-carpet treatment when they came to market, the investment community--which includes hedge funds, mutual funds and bank syndicates--has turned downright surly.

These investors, who had formerly acquiesced to an array of debt-financing schemes and structures that "all go in the bucket of borrower-friendly terms," says Bob Filek, transaction services partner at Price water house Coopers, are now playing hard to get. They are insisting on higher interest rates and coupons for both investment-grade notes and junk bonds, shunning bond structures known as "covenant-lite" for their easy terms and turning up their noses at all manner of gimmicky loans geared to make life easier for issuers.

"The market has turned dramatically in the just the last few weeks," says Peter Foley, managing director of the media, communications and entertainment business at GE Capital Corp., who was Interviewed in late July. "It's become an unsettled and uncertain place, and it's difficult to commit to issuers."

Steve Smith, joint global head of leveraged finance at UBS, agrees. "The biggest and most dramatic change is the disappearance of the CLO [collateralized loan obligation] market," he says. "The huge, mega-LBOs [leveraged buyouts] have clogged up the marketplace, and the CLO market is closed for repair."

Commencing in late June, the markets had grown so recalcitrant that in a scorecard listing compiled by The Wall Street Journal, among other things, 29 stalled or jilted bond financings were dubbed "debt dilemmas." Included was the notorious collapse on June 5 of two Bear, Stearns & Co. hedge funds, which required a $1.6 billion bailout by the Wall Street investment bank. Both funds, which were heavily invested in subprime-mortgage debt, are essentially worthless, and Bear Stearns has since ousted co-president Warren Spector.

Meanwhile, leveraged buyouts predominated among the troubled financing situations cited by The Journal. These included:

* U.S. Foodservice Inc. pulled its $3.6 billion bond-and-loan deal on June 26 that would have seen the company taken private by buyout firms Kohlberg Kravis Roberts & Co. and Clayton Dubilier & Rice. It was "the first jumbo LBO postponed in a long time," Reuters Loan Pricing Corp., a New York-based research group and database, declared in its second-quarter report.

* Chrysler Group's $20 billion leveraged buyout, which is being engineered by Cerberus Capital Management, nearly drove off the cliff on July 20. The private equity firm's bankers postponed a sale of $12 billion in debt for the auto company, which is being hived off from Daimler Chrysler. And while issuers have been successful in raising $8 billion in loans for Chrysler's moneymaking finance unit, they were forced to raise interest rates.

* Alliance Boots, the U.K. drugstore chain, announced on July 20 it would postpone senior note financing indefinitely in the $18.4 billion LBO being engineered by Basis Capital Funds Management. Junior debt is being offered to investors--but at higher interest rates. The appearance of a European deal like Alliance Boots on the list confirms that "this is absolutely...