by Calculated Risk on 2/08/2008 02:29:00 PM

From Bloomberg: Loan Losses May Spur Writedowns, Bank of America Says

Banks sitting on $160 billion of unsold leveraged loans may have to write down more losses after a plunge in the value of the debt, according to Bank of America Corp. analysts.
...
``The substantial widening in loan spreads and the lengthening in expected maturities as refinancing options dim have now threatened an unwind in leverage,'' the report said. ``A replay of last year's third-quarter bank writedowns for hung bridge exposure may be on the horizon.''

In many LBO deals, the investment banks provides a bridge loan until they can syndicate the debt. Because of the credit crunch, the banks haven't be able to sell the debt, and the bridge loans are "hung" on the banks balance sheet. Many people refer to these hung bridge loans as "pier loans"; a bridge to nowhere.

The average price for the most actively traded U.S. loans fell to 88.37 cents on the dollar this week, from 91.14 cents last month, according to S&P's LCD. Prices have fallen from 100, or face value, last June.

Although the banks have already taken write-downs on these pier loans, they probably haven't accounted for half the losses. The good news is, at least so far, the various companies acquired with LBO debt are still making their interest payments. It will really get interesting if (and when) one of these companies defaults on their debt.