European banks ready to shift LBO loan backlog

By Elena Moya and Tessa Walsh

LONDON (Reuters) - Banks are showing a new willingness to shift the backlog of European leveraged loans that has paralysed the market since mid 2007 after Citigroup's and Deutsche Bank's sales of leveraged loan portfolios.

Europe has made very little progress to date on selling the 75-80 billion euro ($126.6 billion) overhang of aggressively priced and highly leveraged loans backing leveraged buyouts (LBOs) that were caught in the credit crunch and continue to hinder new underwriting.

European banks have so far been unwilling to countenance heavy discounts on the paper and sell at a loss to free up capital, unlike their U.S. counterparts, but recent signs suggest this may be changing.

"Banks are starting to open their books," a private equity source told Reuters, on condition of anonymity.

Citigroup (C.N: Quote, Profile, Research) and Deutsche Bank's (DBKGn.DE: Quote, Profile, Research) sales of $12 billion and $5 billion portfolios of U.S. loans to private equity firms have refocused attention on the European overhang, and banks have redoubled attempts to find a selling price in the last week, bankers said.

"Now it seems like some banks are throwing the kimono open. They are unwilling to be seen sitting still while other banks are clearly derisking," a leading fund investor said.

The European leveraged loan market has seen few public sales of loans to date, but banks have been chipping away at exposure through private sales since mid 2007.

Morgan Stanley (MS.N: Quote, Profile, Research), JP Morgan (JPM.N: Quote, Profile, Research), Lehman Brothers (LEH.N: Quote, Profile, Research), Merrill Lynch and Credit Suisse (CSGN.VX: Quote, Profile, Research) have sold loans in private transactions, the source said.