Concessions made to banks financing the $26 billion leveraged buyout of First Data Corp by private equity group Kohlberg Kravis Roberts & Co. may signal the death of its planned junk bond sale.

KKR's surrender on the $16 billion loan portion of the financing is emboldening bondholders to demand higher yields and other protections for planned high-yield bonds after the current global credit squeeze sapped investor appetite for junk bonds.

KKR, the leveraged buyout firm known for refusing to budge on lending terms, may not be willing to bend further, putting the junk bond sale at risk, investors say.

Bond investors considering buying the high-yield corporate bonds say the size may be scaled back to $6 billion or canceled altogether in favor of bank debt, and a decision is expected as soon as this week. A May filing by First Data said financing for the deal may involve up to $8 billion in junk bonds.

If KKR is going to be inflexible, it's never going to come to high yield, said Eric Misenheimer, who manages $500 million worth of high-yield debt at J&W Seligman in New York. There's a high probability they will scrap the bond sale entirely.

The junk bond market has been frozen for about two months without a sale, the longest stretch Misenheimer can recall in his 18-year career, he said.

The sale also may be delayed until the market knows what the Federal Reserve intends to do to alleviate the credit squeeze that has gripped world capital markets in recent weeks after losses suffered by banks and hedge funds on U.S. mortgage-related securities.

The Fed next meets on September 18, when the central bank is widely expected to cut it federal funds rate target, its main monetary policy lever, to protect the economy from a sharp housing market downturn.

Interest rate futures show investors are betting on a quarter-percentage cut from the current federal funds target rate of 5.25 percent. Some economists predict as much as a half-percentage point cut.

If they do try to do it, they might try the bonds on a wing and a prayer after the Fed meeting, said Misenheimer, who believes the junk bonds must offer yields of 10 percent or more to entice buyers.

KKR in a rare move has agreed to a covenant that places performance criteria on First Data's debt, according to a source familiar with the deal. Adding a covenant makes it easier for the investment banks to sell the debt to investors worried about risks tied to the deal.

KKR declined to comment on details of the financing.

The market's really changed in the last several months and this will pressure the rates, said Ken Karwowski, a high yield portfolio manager at Allegiant Asset Management in Chicago. They'll likely pay a higher rate and have more stringent covenants to offer better protection for debt investors.

Given the way conditions have changed, it's going to take a little more time to put together, Karwowski said on Monday.

The debt burden KKR is taking on to complete the buyout has affected demand, according to James Cusser, a portfolio manager at Waddell & Reed Investment Management in Overland Park, Kansas. That has begun to result in a growing pipeline of bond sales that are waiting to see how the First Data sale performs before coming to market, he said.

The banks are on the hook and they're trying to get the deal done, Cusser said. It's leveraged to the gills and they seemingly can't find a clearing price. Until this gets done, a lot of deals are backing up.