September 14, 2007 (LPAC)--International banks, stuck with unsaleable bonds for corporate takeovers which have frozen up in the credit panic, are offering loans to hedge funds, so that the hedge funds can buy the $14 billion of loans the banks are committed to raise for KKR's leveraged buyout of First Data Corp. This is a desperate attempt by seven international banks--which are, in turn, borrowing from the European Central Bank and the Federal Reserve--to get the debt off their books. According to The Times, Credit Suisse, Citigroup, Deutsche Bank, HSBC, Lehman, Goldman Sachs, Merril Lynch "have taken the highly unusual step of offering hedge fund clients loans of as much as 75 cents in the dollar, in an attempt to kick start the process."

This is another exercise in insanity where the banks are issuing more debt in an effort to sell their own debts which they are claiming as an asset. The problem is, nobody is buying this line any more, nor are they buying the "asset-debts" Whether anyone buys this debt is being watched closely, since KKR has two other big LBOs in the pipeline whose debt continues to be unsold, including the $45 billion dollar TXU acquisition and the 9 billion pound Alliance Boots sale. In the former, a group of banks offered KKR a billion dollars to allow them to pull out of the deal, but neither KKR nor TXU accepted.

As for the Alliance Boots deal--the biggest ever in Europe--already in August, KKR's eight bank underwriters abandoned selling $12 billion of mostly senior loans, and the underwriters have been saddled with the debt. Now, two sources who are involved, according to the International Herald Tribune claim that Deutsche Bank and JPMorgan Chase have found buyers for the $750 million of the "mezzanine" (highest interest/riskiest) debt, but have yet to close the deal. This mezzanine debt pays interest at the enormous rate of 6.5% over the London interbank offered rate (i.e., over 13% total), vs. 2.75% over LIBOR for Alliance Boots debt two months ago. The reports from these two sources are being trumpeted as a sign that demand for credit may be improving.

There are up to $500 billion in leveraged takeover deals out there which need to be financed by the end of the year.