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.