With about $62 billion of new junk bonds poised to flood an uneasy market in coming months, debt investors and the corporate buyout firms that borrow from them may be in for a long, hot summer.

A wave of buyout-related financing is expected to hit the market just as trading activity slows for the summer and Wall Street grows more fearful that weakness in risky subprime mortgages, or home loans to people with patchy credit, could spill into other sectors.

The one-two punch of heavy debt supply and skittishness over two troubled Bear Stearns-managed hedge funds that made bad bets on subprime loans may nudge borrowing costs higher, raising the price tag on the corporate takeovers and share repurchases that have helped prop up U.S. stock gains.

Roughly $12 billion of high-yield or junk-rated bonds is expected to hit the market in coming weeks, according to Credit Suisse.

Farther out, about $50 billion of debt is waiting in the wings, including deals linked to Clear Channel Communications Inc., First Data Corp., Mylan Laboratories Inc., SLM Corp. or Sallie Mae, and Tribune Co.

It's not going to be a (bond) seller's market, said Justin Monteith, an analyst at high-yield research firm KDP Investment Advisors in Montpelier, Vermont.

Summer, supply, and then the Bear Stearns and subprime issue in the back of everybody's minds will be weighing on the market, Monteith said.

A ravenous appetite for bonds and loans from junk-rated companies has allowed buyout firms like Blackstone Group LP to finance acquisitions at increasingly attractive interest rates and terms.

Low default rates have bolstered investors' confidence in junk bonds and loans, and with investors doling out cash to even the most troubled companies, default rates have in turn remained low.

But the marriage of convenience between debt investors and leveraged buyout (LBO) firms may be tested this summer given the sheer amount of supply in the pipeline and broader worries about a potential withdrawal of liquidity, or available investor cash, caused by the subprime mortgage mess.

For months, we have watched the ongoing deterioration in the subprime market and the pipeline of LBO financing looking for that explosive headline that would turn the tide, said Louise Purtle, an analyst at New York-based research firm CreditSights, in a report on Monday.

While that appears to have been averted for the moment, looking forward, the concerns continue to mount, she said.

First Data, which processes credit and debit card payments, plans to issue up to $8 billion of junk bonds as part of $24 billion in debt financing for its leveraged buyout by Kohlberg Kravis Roberts & Co.

The issue would be the largest junk bond offering ever, topping the $6.1 billion sold in 1989 for KKR's buyout of RJR Nabisco, according to Thomson Financial.

Meanwhile, U.S. credit markets are still being roiled by fears that investors will withdraw their cash from the market after two Bear Stearns hedge funds made bad bets on securities linked to subprime mortgages and turned in significant losses.

THE FIRST CRACKS?

Worries about a logjam in supply and broader fallout from Bear Stearns' subprime woes have already raised borrowing costs slightly and forced borrowers to agree to less lenient lending terms.

The average spread on junk bonds, or difference in yield over ultra-safe U.S. Treasury bonds, has jumped 39 basis points to 280 basis points on Monday compared to the beginning of June, Merrill Lynch data show. The higher yield spread means investors want more cash to take on the same risk.

The $5.3 billion of loans and bonds financing the buyout of Thomson Corp.'s Thomson Learning by private equity investors struggled on Friday as the firm was forced to retool terms after meeting resistance from investors.

The endless demand for yieldy paper has suddenly become at least a little bit more discerning, because of heavy supply and subprime worries, said Dominick DeAlto, senior portfolio manager at Weiss, Peck and Greer in New York.

I'm not suggesting that that's drying up, but certainly, it's the first crack, he said.

Companies have also had to deal with higher U.S. Treasury bond interest rates, which serve as a benchmark for mortgage rates and corporate borrowing rates.

All these factors -- heavy bond supply, worries about subprime mortgages and liquidity, higher Treasury yields, along with higher leverage at U.S. companies and possible credit-rating actions -- could make for a volatile summer.

If (the subprime issue) doesn't blow up, everyone's still going to wonder if it's there. Because you're never going to know the problem's not there, KDP's Monteith said.

Thomson Corp. announced in May that it was selling its education assets for about $7.75 billion to pursue other opportunities.

The Canadian publisher has agreed to buy London-based Reuters Group Plc for about $17.2 billion.

(Reporters and editors involved in writing and editing this report may own Reuters securities and are bound by the Reuters code of conduct, which restricts dealing in securities in companies a journalist is reporting on.)

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