Banks cut LBO loan holdings

U.S. banks have whittled their holdings of leveraged buyout loans to $129 billion from $163 billion at the beginning of the year by selling the debt for as little as 80 cents on the dollar, according to analysts at Bank of America Corp.

The decline is a “ray of hope” for banks amid a slump in credit markets and a slowing economy, the analysts said. They estimated that the banks also have $73.6 billion of high-yield bonds they want to sell.

Lehman Bros. Holdings Inc. said this week it had reduced its LBO backlog by $6.1 billion, to $17.8 billion, since the start of the year. Goldman Sachs Group Inc. said it halved its holdings to $20 billion.

Private equity firms, including Blackstone Group, Apollo Management and Kohlberg Kravis Roberts & Co., negotiated more than $370 billion in financing to back acquisitions such as the $32-billion purchase of Texas power producer TXU Corp. and the $46.8-billion sale of Canadian telecommunications company BCE Inc. to an investor group led by the Ontario Teachers Pension Plan, the largest buyout ever.

Investor demand for debt issued to finance acquisitions plummeted in July as losses on U.S. sub-prime securities spread to other asset classes. The average price of a leveraged loan fell from par, or 100 cents on the dollar, to a record low of 86.28 cents on the dollar last month, according to Standard & Poor’s. The average price has since climbed to 87.32 cents on the dollar.