Leveraged deals nag Wall Street banks

By Kevin Plumberg - Analysis

NEW YORK (Reuters) - Leveraged-buyout deals have become gum on the shoe of many investment banks, adding to the list of reasons that Wall Street firms will likely face billions more in write-downs in the first quarter.

Write-downs are expected to trigger quarterly losses at some banks and brokers, and as long as these companies are wrestling with bad assets, it will be difficult for their shares to rise much, analysts said.

Reports this week that a $20 billion buyout of Clear Channel Communications Inc (CCU.N: Quote, Profile, Research) was stalling underscored the problems that banks and brokers face by keeping leveraged loans on their books. Clear Channel said on Thursday it had won a temporary restraining order from a Texas judge that prevents banks from reneging on their commitments to finance the deal.

Banks once rushed to finance leveraged buyout deals, which can generate big fees and mountains of other investment banking business. Now these deals look increasingly toxic. The six banks involved in Clear Channel face potential losses of about $3 billion to $4 billion on the deal.

Skyrocketing defaults on subprime mortgages broadened into an all-out credit crisis about eight months ago, seriously hurting investor demand for credit-related securities, including leveraged loans, the lifeblood of LBOs.

Trouble in the leveraged loan market hits Wall Street firms in at least two ways: Banks are having trouble selling or syndicating loans they have already funded, known as "hung loans," and banks are also writing down loans they've committed to make, but have not yet funded.

CITI'S EXPOSURE

One of the banks in the Clear Channel deal, Citigroup Inc (C.N: Quote, Profile, Research), has the most exposure to subprime assets and collateralized debt obligations of the Wall Street banks, at around $37.3 billion, according to Oppenheimer & Co Inc., and so leveraged loan write-downs will magnify the pain.