Credit Suisse, Citigroup take losses on LBO debt

Credit Suisse Group, Citigroup Inc. and JPMorgan Chase & Co. are taking losses on leveraged buyout loans to prevent deals from falling apart and avoid getting stuck with as much as $320 billion in debt.

Credit Suisse, the lead arranger of financing for First Data Corp.'s LBO, last week agreed to lower the amount of loans that banks initially will sell to $5 billion from $14 billion, and cut the price to 96 cents on the dollar, said three people with knowledge of the talks. The discount alone could cost about $200 million.

Citigroup and JPMorgan, both of New York, and at least nine other lenders in the takeovers of Alliance Boots Plc and Allison Transmission Inc. also agreed to sell debt at discounts. Banks are trying to lure investors back to high-yield loans and bonds to limit losses on their LBO commitments.

Investment banks "find ways to live through these kinds of events,'' said Brad Hintz, an analyst at Sanford C. Bernstein Inc. in New York, who follows the securities industry. ``They're used to dealing with tough negotiators.''

First Data bankers will meet with investors today at 12:30 p.m. in New York, according to the people, who declined to be identified because loan terms are private.

Greenwood Village, Colorado-based First Data, the largest processor of electronic payments, is being acquired by Kohlberg Kravis Roberts & Co. for $26 billion. Credit Suisse, based in Zurich, and six other banks will hold on to an additional $8 billion of loans in the hopes that credit markets improve. They also plan to sell $9 billion of bonds.

Fee Machine

David Lilly, a spokesman for New York-based KKR, declined to comment, as did Bruce Corwin, a Credit Suisse spokesman in New York. JPMorgan's Brian Marchiony and Citigroup's Dan Noonan also declined to comment. While First Data's bankers struggle to complete financing, JPMorgan and Lehman Brothers Holdings Inc. reneged on some $1.8 billion in lending commitments for PHH Corp., the mortgage lender that agreed to be bought by General Electric Co. and Blackstone Group LP.

Blackstone, which planned to buy PHH's mortgage business, told GE that

JPMorgan and Lehman 'revised interpretations'' about whether debt financing would be available, according to a statement by PHH today. As a result, Blackstone may lose access to $750 million.

Private-equity firms such as New York-based KKR and Blackstone Group LP paid Wall Street banks an unprecedented $8.4 billion in fees for arranging LBOs in the first six months of 2007, according to estimates compiled by Freeman & Co. based on Thomson Financial data.

Drying up

That income dried up as the subprime mortgage crisis spread to other parts of the debt market including leveraged loans, bringing deals to a virtual halt. The value of announced private- equity transactions fell to $19.2 billion last month from $87.4 billion in July and $131.1 billion in June, according to data compiled by Bloomberg. LBO firms use borrowed money to fund about two thirds of the cost of the deals. Bankers typically earn fees of 2 percent for underwriting loan sales for buyouts.

First Data will pay $905.3 million in fees related to the purchase, the company said in a filing today with the U.S. Securities and Exchange Commission. Financing fees will account for $601.9 million and a portion of the balance will be paid for in the purchase price, according to the filing.

Writedowns

Banks may have to write down as much as $25 billion of loans and bonds on their books if investors' appetite for high-risk, high-yield debt continues to wane, according to estimates made by Citigroup analysts in August. Banks lose money when they sell loans at a discount. The sales also reduce the value of the debt that remains on their balance sheets.

The banks are beginning to winnow down their holdings.

Deutsche Bank AG, Germany's biggest bank, and JPMorgan, the No. 3 US bank, found buyers last week for the highest-yielding loans financing KKR's purchase of U.K. pharmacist Alliance Boots. The banks had abandoned selling 6 billion pounds ($12 billion) of mostly senior loans in August because buyers weren't interested.

Investors agreed to buy the loans at 95 cents on the dollar, according to bankers.

That concession followed the sale of loans to back the purchase of Allison Transmission, the Indianapolis-based auto- parts supplier, by Carlyle Group and Onex Corp. Banks led by Citigroup, the biggest U.S. bank, sold $1 billion of loans for the Allison purchase for 96 cents on the dollar.

`Kitchen-Sink'

Banks may write down the value of the debt left on their books during the next two quarters, said Dick Bove, an analyst at Punk Ziegel & Co. in Tampa, Florida, who follows securities firms. The writedowns would reduce profit.

``The banks are taking a kitchen-sink quarter,'' Bove said in an interview. ``They are writing off as much as they can conceivably write off this quarter and next quarter, so they can start clean next year.''

Citigroup, down 16 percent this year before today, fell 87 cents, or 1.9 percent, to $45.77 at 11:26 a.m. in New York Stock Exchange composite trading. JPMorgan dropped 53 cents, or 1.2 percent, to $45.01. Credit Suisse fell 1.2 percent to 75.5 Swiss francs in Zurich.

First Data rose 5 cents to $33.60 on the New York Stock Exchange.