LBO debt logjam threatens further write-downs for banks

By Walden Siew and Megan Davies

NEW YORK (Reuters) - Leveraged loan problems are threatening Wall Street banks with a fresh round of write-downs from a $205 billion backlog of buyout debt.

The unsold debt piled up during the leveraged buyout (LBO) boom remains a key concern for banks, already hit by subprime mortgage woes which surfaced in July, investors and analysts fear. If that results in further write-downs, Wall Street could suffer deeper pain which could bring further gloom to the wider economy.

The subprime mortgage meltdown last summer caused banks to reel in lending, halting the two-year private equity deal spree. Banks got stuck with huge loan portfolios on their balance sheets that they could not sell to investors.

Worries about these hung loans have not gone away.

"The concern remains that LBO debt could come back to bite the institutions that made these commitments," said David Honold, portfolio manager and financial services analyst at Turner Investment Partners in Pennsylvania.

"To the extent that banks have been unable to sell debt for previously completed transactions, there is a concern for further negative earnings impact," Honold added.

Banks typically sell on to investors debt they assume to facilitate deals, but that's been a challenge since the subprime mortgage crisis triggered a wholesale flight from risky assets last July.

That means the debt of a number of deals that have closed, from the acquisition of automaker Chrysler to newspaper publisher Tribune Co., are still sitting on banks' balance sheets.

Now some analysts fear that a worsening economy may cause some companies taken private to default on their debt, causing banks to further write down the value of their portfolios or even unload other debt at fire-sale prices.

"It's obvious the banks are not going to be able to get rid of this debt easily," said Marilyn Cohen, president and portfolio manager at Envision Capital Management in Los Angeles, where she oversees $225 million in assets. "Deals are starting to fall through, and this is going to continue to put pressure on the banks that are holding the debt.

"We're going to see some hits, and banks will be taking more losses on this," she added.

That could mean more trouble for the credit and equity markets, which have been in turmoil since July when the subprime loan crisis hit.

"For the wider economy, growth is slowing down with or without the leveraged loans being sold. If the loans are stuck, it portends poorly for any easing of the credit crunch," Cohen said.

STUCK ON BANKS' BALANCE SHEETS

Banks are trying to sell institutional investors such as hedge funds about $155 billion in unsold loan debt, according to Reuters