Banks face $200bn high-risk debts
By Ambrose Evans-Pritchard
Last Updated: 2:32am BST 23/07/2007
Investment banks could soon be left holding $200bn in high-risk exposure on jumbo takeover deals agreed before the credit markets turned hostile a month ago.
A consortium of banks led by Deutsche Bank and Barclays Capital have yet to find buyers for £9bn in debt to cover KKR's takeover of Alliance Boots, Europe's biggest leveraged buyout and now a barometer of risk appetite for future deals.
Debt fact box
The financing deadline passed at the weekend, leading to speculation that efforts may be halted until the credit market settles down.
Investors have demanded much higher interest rates in the new mood of risk-aversion, as well as stricter "covenants" to protect creditors.
Overall, spreads on high-yield corporate debt have jumped by 130 basis points since it first emerged that two Bear Stearns hedge funds had run into trouble on US sub-prime property debt.
In effect, the cost of credit for mid-tier companies has jumped from 6.9pc to 8.2pc in a month.
Manchester United has become the latest high-profile name to be singed by the credit markets, admitting that it was shelving plans to buy back a £135m tranche of high-interest debt owed to hedge funds. As a result, the football club will have to carry heavier debt- service payments than expected.
Investment banks in the US and Europe are already sitting on a $100bn glut of debt from previous buyouts that they have so far been unable to offload to investors, mostly pension funds, insurance companies and sovereign wealth funds.
A further $270bn will hit the market later this year.
This could leave banks with far more risk on their books than they bargained for, and could ultimately force them to pull back sharply on lending.
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