LBO deals on hold until 2008 as crunch worsens

By Michael Flaherty and Caroline Humer

NEW YORK (Reuters) - A worsening credit crunch and its broad impact on financial markets has some dealmakers predicting that leveraged buyouts are on hold for the rest of the year and perhaps well into 2008.

When banks essentially cut off lending to private equity firms about a month ago, Wall Street hoped the LBO market would return sometime after September. Investors would again buy loans from banks and clear the logjam that has made new deals difficult to arrange -- or so the thinking went.

But in the last few weeks, the private equity industry has become painfully aware that banks will probably be stuck with a solid chunk of the $330 billion of debt they're waiting to offload, limiting their lending ability.

To make matters worse, the subprime fallout has only steepened in the last few weeks, squeezing the commercial paper market, hedge funds and several publicly traded companies.

That has tightened the vise grip on lenders. As a result, some say that, barring another major move by the U.S. Federal Reserve, there won't be any buyouts with heavy debt -- a signature component of the previous private equity deal frenzy -- until well into next year.

"We're in the midst of a major, major credit crunch," said an investment banker at a large commercial bank that arranges and finances private equity deals.

"No LBOs as we've come to know them will be financed for the remainder of the year," added the banker, who requested anonymity.

Private equity firms have hundreds of billions of dollars on hand, and they will be spending it in the next three to six months, experts say.