By Richard Barley
LONDON (Reuters) - Deutsche Bank (DBKGn.DE: Quote, Profile, Research, Stock Buzz) continued to see demand among investors for leveraged loans used to fund private equity buyouts throughout the third quarter but did not want to sell them at depressed prices, its chief executive said.
Markets have fretted about a huge pipeline of LBO loans -- estimated at some $300 billion in the United States and a further 75 billion euros in Europe -- that proved impossible to shift as the credit crisis broke over the summer, and were left littering banks' balance sheets.
"Throughout the third quarter there was interest in leveraged loans," Josef Ackermann, chief executive of Deutsche Bank, said at the Reuters Finance Summit on Thursday. "It was not a shortage of liquidity itself, it was a shortage of demand at the current price level."
"If we had been willing to take the losses and sell our commitments at the lower price, yes, we could have got rid of these exposures. But it would not have been in the interests of our shareholders and nor would it have been probably very wise."
Deutsche Bank is a major player in the leveraged loan market. In Europe, where it is one of the banks leading the 9 billion-pound financing for the leveraged buyout of pharmacy chain Alliance Boots AB.UL, the continent's largest ever LBO.
At the end of the third quarter, total unfunded leveraged lending commitments were 27 billion euros, the bank said on October 31, when it took a 603 million-euro charge on loans and loan commitments.
"Now we see investors are coming back at levels or even above what we have in the book, so in that sense things are normalizing," Ackermann said.
He said the allocation of loans in recent weeks was "a very, very encouraging signal," adding: "It's one of the reasons why I'm actually a bit more optimistic."
There are even some new deals coming through, although they are relatively small. "If it's 2 to 5 billion it's no problem, but the very big ones, 20 billion plus, that you had, they are still very challenging," Ackermann said.
QUALITY COUNTS
Ackermann said an important factor was the quality of the loans that have been retained.
"The deals which are now in this $300 billion are good deals from a credit perspective, so there's not a credit risk," he said.
"So the only question is at what price you want to allocate it, and some banks say: we'll take it on our books, and we're doing actually quite well from the net interest margin."
Ackermann said this could lead other banks to debate about moving back to traditional bank lending versus the originate-to-distribute model where banks act as short-term lenders and then syndicate the risk to end investors.
"For Deutsche Bank this is clearly not the case," he said.
(editing by Elizabeth Fullerton)
© Thomson Reuters 2009. All rights reserved.
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