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Investment banks: The loan market’s tipping point

Banks are paying the price for hanging on to their stuck leveraged loans for so long.

Investment banks are showing as strong a herd mentality when it comes to getting out of their LBO investments as they did getting in to them. Recent weeks have witnessed a sudden rush of leveraged loan sales from institutions that have been grimly sitting on their $250 billion loan stockpile as prices in the secondary market have headed steadily south.

According to Bloomberg, secondary loan prices had recovered to 92 in late April, having hit a record low of 86.3 in February, so many banks have now grasped the opportunity to sell. But there are many loans that will struggle to price above 90 – news that Goldman Sachs and Citi are now selling their Chrysler exposure at less than 65 is a stark indication of where some of the bumper LBOs are now trading. And with everyone seemingly stampeding for the exit at the same time, all those opportunity funds that have been waiting in the wings for months are starting to look very smart indeed.

The banks are clearly under so much pressure to free up lending capacity that they probably have little choice but to sell. One thing that the firms putting portfolios on the block have in common is that they were all very active at lending on aggressive terms to the bumper LBOs that took place in recent years.