Leveraged loans: Banks blink first in LBO standoff


Louise Bowman
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The weather might not have been very spring-like (at least in London), but April heralded definite signs of a thaw in the loan markets. The standoff between the banks and opportunity funds that resulted in the $237 billion logjam of loans in the leveraged finance market (see Leveraged finance: Funds go hungry as distressed trough fails to fill , Euromoney, December 2007) has finally ended, with the former having blinked first.

A series of announcements by large investment banks of loan sales to institutional buyers has been greeted with a sigh of relief in the market, eager to see the stuck pipeline shifted. News that Citi and Deutsche Bank plan to sell a total of nearly $20 billion of leveraged loans to institutional buyers attracted the most attention. In a market as starved of good news as this one it seems almost churlish to point out that the buyers of the loans are not only often being financed by the sellers themselves, but that some of those buyers are buying debt that backs their own deals – at very nice discount to par as well.

Citi was the first to break ranks and announce the sale of $12 billion of its $43 billion unsold leveraged loan book to Apollo Management, Blackstone Group and Texas Pacific Group (TPG). But Citi has agreed to lend the three firms $9.5 billion in order for them to buy the loans at less than 90. Deutsche Bank sold $5 billion-worth of its LBO backlog – again at levels below 90 – again to Apollo and Blackstone. Other banks, including Goldman Sachs and RBS, have also been working on or have completed loan sales recently.

No other choice

It is hard to see these sales as anything other than a good thing for the private equity firms and a bad thing for the banks. But the latter are really faced with no other choice if they want to underwrite any new business. "The reason that we are seeing these sales now is because these banks have already written these loans down," reckons a loan banker. "They are therefore prepared to sell them at a loss now because they have effectively already taken the hit and they can’t lose the same money twice." But the fact that the banks are not only prepared to sell good loans but are even prepared to let the buyers cherry-pick from the portfolios, indicates how tight the spot they find themselves in really is.