LBOs get stuck on the pier

pier

Investment banks fund leveraged buyouts with short-term ‘bridge loans’ to make the deal happen. They then sell those loans to investors, getting them off their books at a profit, then presumably reinvesting the money in another LBO and bridge loan.

Well, that was the theory. When credit markets freeze up like they’re doing now, the banks can’t sell their bridge loans and thus get stuck with them mucking up their books. The bridge loan turns into a pier loan, a pier that goes nowhere, especially when they’re trading at 90 cents on the dollar.

A $14bn attempted sale of debt by banks from the Harrah’s LBO just collapsed. This is causing much gnashing of teeth and has the leveraged loan markets in “disarray.” More pain is certain to come.

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