LBO loan market recovery to take time: M.Stanley

BARCELONA, Spain (Reuters) - The situation in the leveraged loan market, where a huge pipeline of private equity buyout financing has been left stranded due to credit market turmoil, is unlikely to improve until next year, a Morgan Stanley banker said on Friday.

"I think this year is going to get worse before it gets better," Greig Morrish, a vice president at Morgan Stanley and a member of the credit team for the bank's Senior Loans Group, told Reuters in an interview. "Not much is going to happen for the rest of the year."

He said he estimated the global backlog at some $400-$500 billion, with up to 100 billion euros ($137 billion) of funding to shift in Europe and $300 billion in the United States.

"Central banks can only do so much to restore confidence. The banks will have to start lending again, opening warehouse lines, working through the pipeline. It's going to take at least to the end of this year and realistically it's not going to change until Q2 next year," Morrish said on the sidelines of the Euromoney Leveraged Finance conference in Barcelona.

However, investor confidence is a key factor in the equation.

"There's an awful lot of money sitting on the sidelines, sitting in bank accounts, Treasuries, gilts," he said. "Why? Because people are scared stiff. If people see confidence returning, volatility reducing and defaults staying low, people are going to pour back in."

Bankers and analysts have said the one good factor about the timing of the latest turmoil is that it is happening while corporate default rates are at historic lows.

But the liquidity crisis, with even short-term funding proving difficult to raise, bears risks for the economy.

"I think there's a 15 to 25 percent chance we have a really nasty turn, i.e. the liquidity problem does not correct," Morrish said.

"This then flows into financial systems, the economy in general and all the secondary effects that come with that."

"There's nothing wrong fundamentally and on the balance of probability I don't think it is going to go wrong, but there is a chance. People got too aggressive," he said.

ALLIANCE BOOTS

One of the highest-profile deals that has been caught up in the leveraged loan logjam is the 9 billion pounds ($18 billion) of financing backing the buyout of British pharmacy chain Alliance Boots AB.UL.

Kohlberg Kravis Roberts KKR.UL and Stefano Pessina, the company's deputy chairman, agreed to buy Alliance Boots in April in Europe's biggest private equity deal.

The banks arranging the debt, led by Deutsche Bank, JP Morgan and UniCredit (HVB), were forced to delay syndication due to the market turmoil, and the fate of the deal is being closely watched in the broader corporate credit market.

Morrish said among the problems the deal faced was the fact that it was in sterling, with lenders such as collateralized loan obligations (CLOs) preferring euro-denominated debt, and that the business was highly leveraged.

Ratings agency Standard & Poor's said this week that it estimated Alliance Boots's adjusted debt to earnings before interest, tax, depreciation and amortization (EBITDA) at close to 10 times, a level they described as "highly aggressive".

"Having said that, the banks have all lent to Boots and Alliance Unichem before and Pessina has got a very good record at Alliance Unichem and will bring that to a poorly managed, poor-performing Boots business," Morrish said.

He said, however, that there was the risk of a split between the debt arrangers, with the possibility that some banks might seek to sell their exposure cheaply in order to move on, while others would be able to hold the debt on their balance sheet.