March 26 (Bloomberg) -- Banks financing the $19.5 billion buyout of Clear Channel Communications Inc. stand to lose about $3 billion on the transaction because loan prices have tumbled since they promised to fund the deal.

Banks led by Citigroup Inc. and Deutsche Bank AG agreed in April to provide $22.1 billion for the purchase by private- equity firms Thomas H. Lee Partners LP and Bain Capital LLC. Since then, losses on subprime-mortgage securities spread throughout credit markets and loan prices for similar LBOs fell to as low as 85 cents on the dollar.

Clear Channel, the largest U.S. radio broadcaster, dropped as much as 20 percent in New York Stock Exchange composite trading on speculation the purchase will fail as banks seek to renegotiate the terms of the debt. Banks are reeling after $208 billion in credit losses and writedowns. They're also stuck with $200 billion in loans and bonds from leveraged buyouts after failing to find buyers.

``It doesn't appear to be a gentleman's market anymore,'' said Neal Schweitzer, who analyzes the bank loan market as senior vice president at Moody's Investors Service in New York. ``The larger the transaction, the greater the potential for bigger discounts'' when selling the debt.

Citigroup, Deutsche Bank and Morgan Stanley each are responsible for 18.75 percent of the financing, or $4.14 billion, according to the commitment letter filed with the Securities and Exchange Commission in May. Credit Suisse Group, Royal Bank of Scotland Group and Wachovia Corp. each need to fund 14.58 percent, or $3.23 billion.

Citigroup spokeswoman Danielle Romero-Apsilos declined to comment on behalf of the bank group.

Negotiations Stuck

Negotiations are stuck on details of the credit agreement, the Wall Street Journal reported, citing unidentified people familiar with the matter. The banks asked for more cash upfront and stricter payment terms, the New York Times reported yesterday, citing people briefed on the discussions.

Thomas H. Lee and Bain, both based in Boston, agreed to pay $39.20 a share after raising their bid to $37.60 and giving investors a 30 percent equity stake in the company. Shareholders approved the deal in September.

While lenders typically commit to financing when buyouts are announced, the final terms are worked out just before the deal closes.

``Private equity refused to bend on price from $39.20 and the lending syndicate isn't convinced Clear Channel will generate enough cash flow to cover the debt,'' David Miller, an analyst with SMH Capital in Los Angeles, said in an interview. ``Radio values have compressed. This deal looks a lot more expensive now.''

Breakup Fee

A collapse may force the private-equity firms to pay as much as $600 million in breakup fees. Banks may be better off offering to pay the penalty on behalf of the firms rather than completing the deal, said Mark Patterson, chairman and co- founder of MatlinPatterson Global Advisers LLC, which invests in bankrupt and distressed companies.

``It's cheaper for the banks to pay breakup fees and get the loan off their books than try and syndicate these loans at 95 to 85 cents on the dollar,'' Patterson said.

Lisa Dollinger, a Clear Channel spokeswoman, declined to comment. Thomas H. Lee's Matt Benson and Bain's Alex Stanton also declined to comment.

Clear Channel has traded below the offer price because of investor concern that credit-market turmoil will destroy the deal. The stock fell $5.64, or 17 percent, to $26.92 in composite trading on the New York Stock Exchange, representing a 31 percent discount to the offer.

Debt Rallies

Clear Channel debt rallied in anticipation that the company's chance of default would be reduced without the burden of the LBO debt.

The cost to protect Clear Channel's existing debt from default fell for a second day, indicating investors are less concerned about the debt. Credit-default swaps tied to the company's bonds narrowed 11 basis points to 637 basis points, according to CMA Datavision in London. That means it would cost $637,000 to protect $10 million in debt for five years.

Credit default swap prices suggest the deal has a 75 percent chance of failure, Citigroup analyst Eileen Furukawa said in a research report today. The stock price indicates the deal has a 20 percent chance of going through, she said.

``While we don't profess to know the outcome,'' it's more realistic that the deal has a 50 percent chance of succeeding, she wrote.

Reduces Overhang

The collapse of the Clear Channel deal would be a boon for the rest of the high-yield bond and loan markets, which have slumped in anticipation of LBO debt being sold, said Chris Taggert, an analyst at bond research firm CreditSights Inc. in New York. The average price of an actively traded loan has dropped to 88.38 cents on the dollar from more than 100 cents in June, according to Standard & Poor's.

Loans for some LBOs trade even lower. Univision Communications Inc. is at 78 cents on the dollar, according to S&P. Chrysler LLC's $7 billion of loans sell for less than 76 cents on the dollar.

``It reduces the overhang in the deal pipeline and suggests more committed financing maybe could move away,'' Taggert said. ``There would be a huge chunk of the pipeline that disappears and suggests more deals could be canceled.''

Credit-default swaps tied to debt of BCE Inc., whose C$52 billion ($51 billion) buyout is also pending, fell 11 basis points to 662.

Clear Channel still expects to complete the deal during the first quarter, according to a statement late yesterday giving prices for tender offers on some of its debt. The company's controlling Mays family decided to seek a buyer after share repurchases and spinoffs failed to lift the stock price.

To contact the reporters on this story: Pierre Paulden in New York at ppaulden@bloomberg.net; Don Jeffrey in New York at djeffrey1@bloomberg.net

Last Updated: March 26, 2008 16:33 EDT