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Sponsors help banks ease leveraged loan write-down pain

Financial sponsors negotiating block purchases of opportunity loans from banks are being provided with discounted financing. In return for the cheap financing the selling banks are asking for more than the book price of their loans.

Banks negotiating with financial sponsors are selling debt at a limited discount, but providing loans with attractive terms to the buyers to help them generate equity-like returns, according to a lawyer close to a couple of such transactions.

The banks are providing loans at attractive rates because they are able to sell credits which have a book value of around 85 to 90 percent at a price of between 90 percent to 95 percent to face value.

The lawyer said: “This allows the banks to write-down less of the loans and is the most efficient way to get rid of them. The terms are also going to be different for the new debt, allowing the banks more credit security.”

He said the loans being provided to the financial sponsors were being sold with terms which force the borrower to invest more should the loans begin to trade at a substantial discount such as 80 percent to 75 percent. This is in contrast to many of the loans drawn up last year, which provided more leeway for borrowers and less power to creditors.

He said he had acted for a couple of financial sponsors that have looked to buy block trades of leveraged loans from banks in this manner. Both Deutsche Bank and Citi have been in negotiations with private equity firms to sell approximately $22 billion (€14.2 billion) of debt, according to reports.

KKR Financial, a listed investment arm of the global buyout firm, is considering buying the debt related to the buyout firm’s £11.1 billion (€14 billion; $21.6 billion) Alliance Boots transaction, according to the firm’s spokeswoman.

Several other firms have looked at the Alliance Boots transaction, the lawyer said. The Boots banking syndicate, led by Deutsche, JPMorgan and Unicredit, is considering providing discounted loans, he said.

Citi and Deutsche Bank could not be immediately reached for comment.