Lehman Plans EU1.1 Billion CLO to Cut Buyout Loans, People Say

Lehman Plans EU1.1 Billion CLO to Cut Buyout Loans, People Say

April 29 (Bloomberg) -- Lehman Brothers Holdings Inc. is seeking investors for a collateralized loan obligation that would buy 1.1 billion euros ($1.72 billion) of high-yield debt from the securities firm, said two people with knowledge of the deal.

Lehman's Thalia European CLO includes loans that the fourth- largest U.S. securities firm provided for leveraged buyouts, said the people, who declined to be identified before the transaction is complete. CLOs package loans and channel the income to investors in portions of varying risk and credit ratings.

Lehman was the fourth-biggest arranger of LBO financing in Europe last year, providing loans for the buyouts of ProSiebenSat.1 Media AG, Germany's biggest private broadcaster, and French phone directory business PagesJaunes SA, according to data compiled by Bloomberg. The New York-based firm cut its backlog of unsold LBO loans by $6.1 billion to $17.8 billion this year, Chief Financial Officer Erin Callan said last month.

Lehman, Deutsche Bank AG in Frankfurt and Credit Suisse Group in Zurich have created CLOs, helping to cut the amount of unsold LBO loans to $91 billion from $230 billion in July, according to Bank of America Corp. data. Banks got stuck with the debt after losses on securities tied to subprime mortgages caused investors to shun all but the safest government bonds.

Lehman spokesman Mark Lane in New York declined to comment on the Thalia European CLO.

Backlog Reduced

Lehman said this month it used ``small part'' of a $2.8 billion CLO called Freedom as collateral to borrow from the Federal Reserve's Primary Dealer Credit Facility, a lending program set up in March after the near-collapse of Bear Stearns Cos. threatened to spread to other banks. Some collateralized debt obligations are eligible as backing for loans from the European Central Bank, according to the ECB's Web site.

Leveraged loans are made to buyout firms, who borrow to finance about two-thirds of the cost of acquisitions. The debt is rated below Baa3 by Moody's Investors Service and less than BBB- at Standard & Poor's.

Banks are stepping up sales of the debt as prices for actively traded high-yield loans have risen 4.8 cents to 92.1 cents on the dollar since March, S&P data show. The debt may have its best month after losing 5.7 percent in the first quarter, Lehman analysts wrote last week.

Citigroup Inc., Deutsche Bank and Royal Bank of Scotland Group Plc have also offered financing to investors including private-equity firms to purchase the loans.

Blackstone Group, Apollo Management LP and Kohlberg, Kravis Roberts & Co., all based in New York, were among buyout firms that borrowed more than $370 billion to back acquisitions before losses on mortgage securities spread to loans, bonds and collateralized debt obligations.

BLOOMBERG