LONDON (Reuters) - Alliance Boots has postponed syndication of the 5.05 billion pounds of senior debt backing its leveraged buyout, Europe's largest ever, a source familiar with the situation told Reuters Loan Pricing Corp. (RLPC) on Wednesday.

The company, which is being bought by Kohlberg Kravis Roberts & Co and deputy chairman Stefano Pessina for 11.1 billion pounds, is pressing ahead with the syndication of 1.75 billion pounds of second-lien and mezzanine debt at steep discounts, with responses on these tranches due by Friday, the source said.

"Market conditions drove our decision to withdraw the senior (debt) at this time", the source said.

The turbulent European leveraged loan market is experiencing record volatility, which is causing a market-wide repricing as investors reassess risk and return.

The Boots loan is the third and by far the largest European leveraged loan to be postponed due to credit market turmoil. A loan for Dutch DIY retailer Maxeda was pulled in mid-July, and German publisher Springer decided not to proceed with a dividend recapitalisation in light of current market conditions.

Boots's 1 billion pound second-lien loan will be offered at 96 percent of face value with an interest margin of 425 basis points (bps), up 25 basis points from the original level, the source said. The loan cannot be called for two years, as before.

The 750 million pound mezzanine tranche will be offered at 95 percent, with a margin of 650 bps, up 50 basis points from the original level.

The mezzanine margin is split 300 bps in cash and 350 bps payment in kind, the source said. The loan cannot be called for three years, as before.

ARRANGERS HOLD SENIOR DEBT

The 5.05 billion pounds of senior debt will now be held by the eight banks arranging the loan until market conditions improve.

The loan is being led by global co-ordinators Deutsche Bank , JP Morgan and UniCredit (HVB) and Barclays Bank , Citigroup , Bank of America , Merrill Lynch , and Royal Bank of Scotland .

"The senior debt has been withdrawn until some future date. The underwriters will hold the senior debt for now. We are very comfortable with it," the source said.

"We will revisit it at the right time. Who knows when that will be," the source said.

The arranging banks had presented a range of options to Boots investors earlier this week, with similar margins but a smaller discount, banking sources said. The margin increases are paid for by sponsor KKR, while the arranging banks finance the discount.

The senior debt was previously offered with a margin of 300 basis points and a discount of 99. The second lien was offered at 425 bps and a 98.50 discount, and the mezzanine was offered at 650 bps and a 98 discount, banking sources said.

The arrangers said the mezzanine tranche was now more or less complete and the second lien had a substantial order book.

"We have a strong bid for the junior tranches and wanted to bifurcate the distribution," the source said.

The current crop of bull market loans that are now under revision on both sides of the Atlantic after encountering market turbulence are littering arranging banks' balance sheets as liquidity ebbs from the loan market.

This is creating exposure issues and losses for banks that mark positions to market, and may affect banks' ability to underwrite new business in the short term, banking sources said.


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