Loan market in ‘disarray’ after Harrah’s upset

The leveraged loan market begins the week in “disarray” following the collapse of efforts to syndicate $14bn of the debt used to finance the $30bn buy-out of Harrah’s Entertainment, bankers say.

The group of banks backing buyers Apollo Management and Texas Pacific Group are having trouble selling on the leveraged buy-out debt to third parties. With the bulk of the debt remaining on their books, the banks are sitting on a sizeable loss.

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Banks are already saddled with more than $150bn of unsyndicated debt, most of it LBO-related, according to S&P data.

Virtually every loan-backed buy-out deal done in the past few months is trading well below 90 cents on the dollar.

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Ironically, the Federal Reserve’s dramatic 1.25 percentage point cut in interest rates in January contributed to Harrah’s problem, because loans are floating rate and with benchmarks such as Libor dropping, returns to investors fall proportionately.