April 24, 2008 3:00 am
Deutsche Bank is preparing another multibillion-dollar sale of leveraged loans, this time in Europe, adding to evidence of a rally in corporate credit markets.
The deal, expected to be announced with the bank's earnings release next week, would mark the third big sale of leveraged loans - which are used to finance private equity buy-outs - by a big bank this month.
Citigroup led the way with a $12bn sale, and Deutsche followed by selling about $5bn of US leveraged loans. Other sales of leveraged loans by banks, insurers and finance companies are expected, market insiders say.
The demand for the loans is an encouraging sign for banks as they attempt to sell a backlog of about $100bn in leveraged loans they are still holding.
The second Deutsche sale could be comparable in size to its earlier $5bn sale of leveraged loans to Apollo Management and Blackstone. However, given the current demand for such credits, the sale could be expanded.
Deutsche is expected to sell loans from its trading book and its backlog of unsold loans. The loans could include a piece of the $16bn financing for the buy-out of Alliance Boots.
Possible buyers include Kohlberg Kravis Roberts, which has shown up at several earlier auctions but has been more cautious than its competitors in what it will pay.
KKR's financial services team has also looked at deals to buy stakes in banks such as Washington Mutual and National City, but pulled out because of concerns about future credit losses, according to people familiar with the matter. KKR declined to comment.
In its first sale of leveraged loans, Deutsche lent the buyers $3 to $4 - at below market rates - for every $1 of credits that Apollo and Blackstone bought. The two firms paid full prices for the loan themselves, according to one buyer.
By providing low-cost financing while selling the loans at their full price, Deutsche was able to avoid marking down its positions to their market prices and having to take losses. If the price of the loans drops, the buyers would have to put up more collateral, offering protection to Deutsche, the loan buyers says.
For the private equity firms, the low-cost leverage provided by the banks offers them a chance to boost potential profits while buying the loans at full prices.
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