Banks should survive credit market hanging

By Jonathan Stempel

NEW YORK (Reuters) - It's a "hanging" that may cause some pain for major U.S. investment banks, though it's unlikely to be lethal for any of them.

The postponements of $22 billion in debt offerings to finance buyouts of British pharmacy chain Alliance Boots AB.UL and U.S. automaker Chrysler has fed fears that if markets continue to tighten, investment banks will be stuck holding billions of dollars of loans no one wants.

Such "hung" loans -- as bankers call them -- result from a sudden reluctance to acquire higher-risk debt among investors spooked by mounting defaults and homeowners and fears that corporate borrowers might soon follow.

Citigroup Inc (C.N: Quote, Profile, Research, Stock Buzz) and JPMorgan Chase & Co (JPM.N: Quote, Profile, Research, Stock Buzz) are the focus of much of the current concern, ranking among the top five merger advisers -- a big source of fees -- and top three debt and equity underwriters and leveraged lenders.

But the problem extends throughout investment banking and could affect other dominant firms like Goldman Sachs Group Inc. (GS.N: Quote, Profile, Research, Stock Buzz) and Morgan Stanley (MS.N: Quote, Profile, Research, Stock Buzz).

The average yield on junk bonds has risen by more than a percentage point to 8.64 percent as of Wednesday, according to Merrill Lynch & Co., the highest in over a year.

Where and when the bottom will be hit is anyone's guess.

"A lot of the deals that were on the track are going to get completed, because any of those big take-private deals that were agreed to have no financing 'outs,'" Rob Engel, head of mergers and acquisitions at Wachovia Securities, told Reuters. "That's the risk that a lot of the banks are now wearing."