Oct. 16 (Bloomberg) -- The record rally in the price of loans owed by the riskiest corporate borrowers may end a two- year drought in leveraged buyouts.

Banks provided almost $7.5 billion of high-yield loans in the U.S. and Europe since July 1 to finance acquisitions, more than double the amount in the three months ended June 30 and more than four times the figure in the first quarter, according to Standard & Poor’s LCD. Borrowers seeking a $1 billion loan now would pay about $60 million less in interest annually than in December.

Bank of America Corp. and JPMorgan Chase & Co. are leading banks starting to provide loans again for leveraged buyouts after prices of the debt rose by 45 percent from a record low in December as measured by the S&P/LSTA U.S. Leveraged Loan 100 index. The surge is drawing investors, allowing banks to re-sell pieces of the loans and cut their risk.

“The LBO market is coming back,” said Glenn Stewart, managing director of leveraged finance at Bank of America Merrill Lynch in New York. “There’s clearly better access to financing than there was a year or two ago, and that financing is more reasonably priced than it had been.”

The S&P/LSTA 100, which tracks the 100 largest dollar- denominated first-lien leveraged loans, climbed to 85.55 cents on the dollar this month, from a low of 59.2 cents on Dec. 17. The increase translates into interest costs that average 5.06 percentage points more than the London interbank offered rate, down from a spread of 11.12 percentage points. Three-month Libor was set at 0.28 percent yesterday.

‘Substantially Brighter’

Blackstone Group LP agreed Oct. 7 to buy brewer Anheuser- Busch InBev NV’s amusement park unit that includes SeaWorld and Busch Gardens for as much as $2.7 billion in the largest private-equity deal this year.

The world’s biggest buyout firm actually began looking into buying the assets before the Belgian brewer’s $52 billion acquisition of Anheuser-Busch was completed in November 2008, according to a person familiar with the situation who declined to be identified because he wasn’t authorized to speak publicly about the deal.

“The future now looks substantially brighter for us in the private equity business,” Stephen Schwarzman, chief executive officer of Blackstone, told attendees at the Super Return Middle East conference in Dubai Oct. 14.

The gains in loan prices mirror those of the broader debt market as the economy recovers from the first global recession since World War II, and the pace of losses and writedowns at the world’s biggest financial institutions slows.

Below the Peak

The survivors are starting to thrive. Citigroup Inc., the lender 34 percent owned by the U.S. government, said yesterday it posted a $101 million profit for the third quarter, defying expectations for a loss as the company added the smallest amount to loan-loss reserves in two years. JPMorgan, the second-largest bank by assets, said this week that third-quarter profit rose almost sevenfold, beating analysts’ estimates as fixed-income revenue surged. Both firms are based in New York.

Junk bonds have returned 50 percent on average this year, including reinvested interest, after losing 26 percent in 2008, according to Merrill Lynch & Co.’s U.S. High Yield Master II index. Securities and loans rated below Baa3 by Moody’s Investors Service and BBB- by S&P have even outperformed the 38 percent increase in the Nasdaq Composite Index.

The market for so-called leveraged loans remains below the peak reached before credit markets seized up. Bank lending for high-yield companies in the U.S. stands at $86.3 billion this year, compared with a record $769.2 billion in 2007, according to data compiled by Bloomberg.

Alliance Boots

Lending to fund takeovers began to slow in July 2007, when bankers couldn’t find investors for the credit they provided in New York-based KKR & Co.’s 11.1 billion-pound ($18 billion) purchase of British drugstore chain Alliance Boots Ltd.

LBOs tumbled to $58.8 billion this year from $197.2 billion in 2008 and $663.1 billion the year before, Bloomberg data show.

Buyers face tougher lending criteria and higher interest margins than in the pre-credit crisis boom, which will translate into lower prices for sellers and limit acquisitions, said Neil MacDougall, managing partner of Silverfleet Capital.

London-based private equity firm Silverfleet bought German sausage-casings maker Kalle Holding GmbH for 212.5 million euros ($317.9 million) using 133 million euros of leveraged loans in August.

‘Test the Waters’

During the LBO frenzy, buyout firms were able to finance about two-thirds of the purchase price of their deals in debt. Blackstone provided $5.5 billion in equity and raised $21 billion in loans to finance its 2007 buyout of Hilton Hotels Corp. Now, the New York-based firm is putting up $1 billion to acquire AB Inbev’s parks unit, while banks are arranging $1.5 billion of debt, according to the person familiar with the deal.

“Given the stability and the strength in the loan market, sponsors and corporations are beginning to test the waters again,” said Douglas Antonacci, head of leveraged loan sales at JPMorgan. “We’re not there yet, but the new issue market is showing signs of life.”

Bank of America Merrill Lynch, Barclays Capital, Deutsche Bank AG, Goldman Sachs Group Inc. and Mizuho Corporate Bank Ltd. are arranging a 6 1/2-year, $950 million senior secured term loan and a five-year, $100 million revolving credit line to finance a portion of Blackstone’s purchase of AB InBev’s parks unit, according to the person familiar with the transaction.

Goldman Sachs and GSO Capital Partners, a unit of Blackstone, will provide $450 million in more-junior, mezzanine financing over seven years, said the person.

Blackstone officials declined to comment.

Skype Financing

Goldman Sachs, KeyBank NA and GE Capital Markets Inc. are arranging a $330 million leveraged buyout loan to finance New York-based American Securities LLC’s purchase of GenTek Inc. in a transaction valued at $673 million, according to a Sept. 29 filing with the U.S. Securities and Exchange Commission. Parsippany, New Jersey-based GenTek makes GT Technologies valve- train equipment and chemicals used in water treatment.

The rate on American Securities’ $300 million term loan will be 4.75 percentage points more than Libor, according to the commitment letter attached to an SEC filing. The $30 million revolving credit facility will have a margin of 4.5 percentage points. Libor will have a 2.5 percent floor, the commitment letter shows.

A group of buyers led by Menlo Park, California-based private equity firm Silver Lake agreed last month to buy 65 percent of Internet-based calling service Skype from EBay Inc. in San Jose, California, in a transaction valued at $2.75 billion.

Investors More Confident

JPMorgan, Barclays Capital and RBC Capital Markets are arranging a five-year, $600 million term loan at a rate of 9.5 percent or 7.5 percentage points more than Libor, whichever is higher, to finance the purchase. In order to attract investors to the financing, bankers for the Silver Lake group had to boost the interest margin by 1.5 percentage point and increase the discount at which they’re offering the debt to 4 percent, from 3 percent, according to a person familiar with the matter.

John Dillard, a spokesman for Silver Lake, didn’t return a message left at his office or an e-mail seeking comment.

With credit markets recovering investors are more confident putting money into loans, suggesting interest margins may continue to narrow, making buyouts more profitable to private equity firms. Mutual funds that invest in bank loans have attracted more than $4 billion this year, according to Lipper FMI data.

“Demand in the market for these loans is going to propel additional financing activity,” said Vanessa Spiro, a partner with law firm Jones Day in New York who focuses on leveraged lending. “Mutual funds have the capital and the appetite to invest in leveraged loans.”

Europe

Europe is also seeing an increase in takeovers. London- based CVC Capital Partners Ltd. obtained about $1 billion in senior debt from a group of banks to help finance the purchase of AB InBev’s breweries in nine central and eastern European countries, in a deal that valued the businesses at as much as $3.03 billion, the two companies said in a statement Oct. 15.

Montagu Private Equity LLP is said to be arranging more than 100 million pounds of leveraged loans on behalf of bidders interesting in buying Survitec Group Ltd., the Dunmurry, Northern Ireland-based military hardware maker.

“As the high-yield market has shown us there’s enough desire to own credit product; the appetite should follow to loans,” Citigroup strategists John Fenn and Jason Shoup wrote in a Sept. 25 report.

To contact the reporter on this story: Emre Peker in New York at epeker2@bloomberg.net; Patricia Kuo in London at pkuo2@bloomberg.net

Last Updated: October 16, 2009 03:11 EDT