It has looked like LBO loans were going to be hard for banks to syndicate to institutional investors. They tend to be fairly risky because the companies taken private often have to do very well to cover the debt service. Concerns about that happening in a recession are growing.
All of this means that big money center banks are being stuck with the loans. Since they are almost certainly worth less than their face value, that could lead to another round of write-downs at banks.
According to The Wall Street Journal, "with the prices of existing loans tumbling, investors have little incentive to buy new loans unless they are sold at steep discounts, something banks are reluctant to do." JPMorgan (NYSE: JPM) held $26.4 billion in LBO loans at the end of last year. Other large banks probably have similar amounts on their balance sheet. Many of these will be sold for 90 cents on the dollar, if they get sold at all.
Banks may have another series of financial problems just around the corner.
Douglas A. McIntyre is an editor at 247wallst.com.
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