Banks pare backlog of unsold debt to $370 billion

Banks reduced the backlog of unsold corporate debt by 2 per cent in the past two weeks to $370 billion as investor demand for leveraged loans and bonds improved, Bank of America Corp analysts said.

Credit Suisse Group last week led banks selling $5 billion of loans to finance Kohlberg Kravis Roberts & Co.'s buyout of credit card-processor First Data Corp. Citigroup Inc. found buyers for $1 billion of loans to Allison Transmission Inc., the auto-parts supplier owned by Carlyle Group LP and Onex Corp.

"The door creaks slowly open in credit markets,'' Bank of America strategists led by Jeffrey Rosenberg said in a research note. ``Clearly credit conditions have improved.''

Banks returned to the market as investor confidence in high- risk, high-yield loans climbed to the highest in two months, according the benchmark iTraxx LevX Index of credit-default swaps on European loans.

Goldman Sachs Group Inc., the world's biggest securities firm, Lehman Brothers Holdings Inc. and Bear Stearns Cos. all say the worst credit-market shakeout since 1998 is abating.

Banks in the US and Europe still have to syndicate the equivalent of almost three-quarters of the entire $500 billion of loans held by money managers in America, according to the research published September 22.

First Data's banks have kept $17 billion of debt they planned selling for the Greenwood Village, Colorado-based company.

``Banks are getting some of their overhanging debt away, albeit piecemeal,'' said Fiona Hagdrup, who helps manage 2 billion euros of high-yield loans at M&G, the fund-management arm of UK insurer Prudential Plc. ``Most banks are peddling the message that they're fine and no fire sales are needed and so far, they seem to be sticking to this.''

Banks underwriting the financing for LBOs commit to raise the money and earn fees to compensate for the risk of having to take on any debt they can't sell to a wider group of investors. They have to mark down the value of the debt and assume a loss if the price of high-yield loans falls below 100 percent.

Deutsche Bank AG shares fell 2.5 percent today after Reuters reported it may have to write down as much as 1.7 billion euros ($2.4 billion) of leveraged loans that it can't sell during the third quarter. The stock is down 11 percent this year.

Deutsche Bank led a group that failed to find buyers in June and July for debt funding the takeover of U.K. pharmacist Alliance Boots, two bankers involved said on Sept. 13.

U.K. financier Guy Hands' Terra Firma Capital Partners Ltd. last week started seeking 2.3 billion euros for its German highway services chain, Autobahn Tank & Rast Holding GmbH.

"Sentiment has improved dramatically,'' said Louis Gargour, chief investment officer of London-based hedge fund LNG Capital LLP. ``It doesn't mean the credit markets are of trouble.