September 14, 2007 (LPAC)--The big banks are searching for ways to unload more than $350 billion of leveraged buy-out (LBO) debt they have incurred in financing private equity deals. Unable to find buyers for this whole pile of crap, the banks have begun parcelling it out in small doses, at small discounts to its nominal value.

According to the Wall Street Journal, the banks holding debt from KKR's $22 billion takeover of Britain's Alliance Boots have sold some $1.5 billion of the debt for 95-cents on the dollar of face value, and banks sold $1 billion of debt from Allison Transmission for 96-cents on the dollar.

The banks have pulled a similar maneuver by offering to sell $5 billion of the $24 billion in debt they are holding on KKR's takeover of First Data. The bank leading the financing group, Credit Suisse, not only offered the debt at 96-cents on the dollar, but also offered to lend the buyers some of the money to buy the debt! The Credit Suisse group also includes Citigroup, Deutsche Bank, HSBC, Lehman Brothers, Goldman Sachs, and Merrill Lynch.

In addition, the $5 billion of debt will have 'most-favored nation' status, meaning that if any subsequent parts of the debt is sold at a lower price, the earlier buyers will be compensated, according to Bloomberg.

These discounts bode ill for the sale of the rest of the LBO debt, which include the debts from the two biggest LBOs in private equity history: the $32 billion LBO of Texas electric utility TXU; and the $33 billion LBO of Canadian phone company BCE, both of which banks agreed to before the bottom fell out of the market.