NEW YORK - Food giant Kraft Foods and Warren Buffett's Berkshire Hathaway sold $17.5 billion in debt on Thursday, braving a suddenly weak corporate bond market to finance major acquisitions, market sources said.

Kraft's $9.5 billion debt offering was the sixth-largest U.S. corporate bond sale on record, according to Thomson Reuters data. Proceeds will help finance Kraft's $18.5 billion acquisition of British chocolatier Cadbury.

Berkshire Hathaway sold $8 billion of debt to help pay for its $26 billion acquisition of railroad operator Burlington Northern Santa Fe Corp. That bond deal is the 11th largest U.S. corporate bond sale ever.

The two bond deals ran the gamut of credit quality in the investment-grade arena, with Berkshire Hathaway's ratings close to the highest and Kraft just steps above junk status.

With Berkshire, you're buying something that's very, very safe and when you lock in that return you know what you're going to get at the end of the period, said William Larkin, portfolio manager at Cabot Money Management in Salem Massachusetts. Its model is basically a portfolio of other businesses, so it's a diversification play.

KRAFT SWEETENS YIELDS

Kraft is also a diversification play, given that it is the No. 2 food business in the world with exposure to developed and emerging markets, Larkin said. However, Kraft is adding a good deal of debt with the Cadbury acquisition and its rating could be downgraded, he said.

While demand has been strong for corporate bonds, concerns about mounting sovereign risk and tumbling stocks put a damper on the credit market on Thursday.

Kraft, which announced pricing of its deal on Wednesday, raised the yield spreads on Thursday after the corporate bond market sold off.

I think they had to pay up a little bit to do the (large) size, and the market's weakness just added to it, said Bob Bishop, portfolio manager at SCM Advisors in San Francisco.

For example, Kraft raised the yield spreads on its 10-year notes by about 5 basis points to 190 basis points over Treasuries. By comparison, its outstanding debt with a 2018 maturity was yielding about 140 basis points over Treasuries earlier this week.

The Dow Jones industrial average fell 2 percent as escalating sovereign debt problems in Europe and a surprise rise in U.S. jobless claims sparked concerns about the global economy.

BERKSHIRE HIT WITH DOWNGRADE

Berkshire sold mostly short-term debt, including two-year fixed-rate notes at 65 basis points over Treasuries, three-year fixed-rate notes at 85 basis points over Treasuries and five-year fixed-rate notes at 95 basis points over Treasuries.

Berkshire also faced headwinds, losing its last top AAA on Thursday as Standard & Poor's downgraded it one notch to AA-plus. S&P said the cost of the Burlington acquisition would reduce Berkshire's historically strong capital adequacy and liquidity.

A key concern is that Berkshire's risk tolerances appear to have increased, yet we believe they remain ill-defined while the organization increases in complexity, S&P said.

Moody's Investors Service cut Berkshire to Aa2 in April, its third-highest rating, while Fitch in March cut Berkshire's senior unsecured rating to AA, its third-highest rating.

Even after the market's weakness on Thursday, yields on corporate bonds remained close to five-year lows, keeping borrowing costs down, and demand has been strong. For example, Kraft's bond sale had attracted about $23 billion in demand as of early Thursday, according to IFR, a Thomson Reuters service.

On average, corporate bonds now yield about 4.6 percent, down from a record high of 9.3 percent in October 2008, at the height of the global credit crisis.

Given the market liquidity problems that happened a year or so ago, firms are more interested in locking in funding for a deal rather than waiting till a later moment, said Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott in Philadelphia.

(Editing by Chizu Nomiyama)

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