By Richard Barley

LONDON (Reuters) - Corporate debt investors have always been worriers, but the seemingly inexorable rise of credit derivatives is generating a whole new crop of concerns in leveraged buyout situations.

Take the case of British pharmacy chain Alliance Boots, which is the subject of a bidding war that will be Europe's biggest ever LBO if completed.

The credit derivatives market initially took fright at the approach by Kohlberg Kravis Roberts and Alliance Boots deputy chairman Stefano Pessina, pushing the cost of insuring the company's debt against default up from the low 30s basis points to a range of 150-190 basis points.

Now, perversely, some market participants are worried about something that should be good news for holders of the company's bonds: that they may be bought back and refinanced by the new owners instead of being added to the pile of debt that will be used to buy the company.

That poses the risk that credit default swaps referencing those bonds could become effectively worthless.

CDS on Alliance Boots fell 5 basis points on Friday to 182 basis points, dealers in London said, despite the outbreak of a bidding war as a rival consortium led by Terra Firma offered 10.9 billion pounds, topping KKR's 10.6 billion pound agreed deal. The price means it would cost 182,000 euros a year to insure 10 million euros of the company's debt against default.

"Alliance Boots is almost certain to be taken over by a private equity group," credit analyst Rob Orman at Royal Bank of Scotland said in a note to clients. "We are now moving onto the uncertainty over deliverability."

Analysts at BNP Paribas said they believed the company's existing bonds, such as the 5.5 percent 2009 sterling bonds, would be taken out.