Banks Cut Unsold Buyout Loan Inventories

A bit of good news on the generally gloomy credit markets front: banks have managed to unload some of the LBO loans they have held on their balance sheets. Admittedly, however, they still have great deal more to place, nearly $130 billion of buyout debt. However, they have had to offer large discounts. Recent reports said that the loans had been marked typically at 88 cents on the dollar; these were sold at prices as low as 80 cents.

From Bloomberg:

U.S. banks have whittled their holdings of leveraged buyout loans to $129 billion from $163 billion at the beginning of the year by offering the debt at discounts, according to Bank of America Corp. analysts led by Jeffrey Rosenberg.

The decline is a “ray of hope” for banks amid a slump in credit markets and a slowing economy, said the Bank of America analysts led by Jeffrey Rosenberg. The firms also have $73.6 billion of high-yield bonds they need to sell, the analysts said.

Banks have been breaking ranks from their lending groups and offering their own pieces of the LBO loans at as little as 80 cents on the dollar to get the debt off their books. New York-based Lehman Brothers Holdings Inc. yesterday said it has reduced its LBO backlog by $6.1 billion to $17.8 billion since the beginning of the year, Goldman Sachs Group Inc. halved its holdings to $20 billion and Morgan Stanley reduced its pipeline by 20 percent…..

Goldman reduced its backlog of loans by $20 billion in the past quarter from $43 billion, chief financial officer David Viniar said on an investor call yesterday. The New York-based firm, which booked a loss of $1 billion on the loans, also added $4 billion of new commitments during the period.

Lehman, the fourth-biggest U.S. securities firm, booked losses of $500 million on leveraged loans last quarter, CFO Erin Callan said on a conference call with investors yesterday.

Morgan Stanley, the second-biggest U.S. securities firm, reduced its leveraged finance pipeline to $16 billion from $20 billion during the first quarter, CFO Colm Kelleher said in an interview today after the company reported first-quarter profit fell 42 percent.

Some of the same LBO firms that generated the debt in the first place are raising funds to buy it back at reduced prices. Blackstone raised a $1.4 billion fund last November to buy bank loans, and Leon Black’s Apollo has bought $1 billion of distressed loans and bonds….

In addition to the buyout firms, traditional loan investors and hedge funds are also buying the debt.

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