Schloss sees leverage loan sale pickup

NEW YORK (Reuters) - Banks who have been unable to syndicate billions of dollars in leveraged buyout loans are likely to start selling off the loans in the next three months, a veteran buyout executive told the Reuters Summit.

A combination of factors is likely to loosen the market for the loan sales, according to Lawrence Schloss, chief executive and co-founder of Diamond Castle Holdings, a $1.85 billion buyout firm founded two years ago.

These include banks' new willingness to cut the price of these loans and the emergence of opportunistic buyers like hedge and private equity funds, some of which have raised new funds to buy the loans.

After years of abundant liquidity to back LBO deals, the credit markets stalled last summer, leaving banks unable to sell what market experts said could be hundreds of billions of dollars in loans committed to the ever-larger buyout deals.

"In the next 30, 60, 90 days is when it starts to move," Schloss predicted at the Reuters Summit this week in New York. He said banks are now offering the loans at a substantial discounts -- sometimes less than 90 cents on the dollar -- to get them off their books.

News that Citigroup (C.N: Quote, Profile, Research, Stock Buzz) is poised to offload some $12 billion in so-called "leveraged loans" could be just the beginning of this trend, said Schloss. He said he expects many other banks that financed buyout deals to do the same.

Among the buyers would likely be big bond funds like Pimco, and also private equity firms like TPG TPG.UL and Blackstone Group (BX.N: Quote, Profile, Research, Stock Buzz), ironically the very funds that did the buyout deals in the first place.

Schloss, who headed Credit Suisse's (CSGN.VX: Quote, Profile, Research, Stock Buzz) $32 billion alternative asset investment business until co-founding New York-based Diamond Castle, said banks have already taken write-downs on the declining value of the loans.

But until they sell their inventory, they won't be able start originating new loans in any substantial way, he said.  Continued...