Sept. 24 (Bloomberg) -- Banks reduced the backlog of unsold corporate debt by 2 percent in the past two weeks to $370 billion as investor demand for leveraged loans and bonds improved, Bank of America Corp. analysts said.

Credit Suisse Group led banks last week selling $5 billion of loans at a discount to finance Kohlberg Kravis Roberts & Co.'s buyout of credit card-processor First Data Corp., after delaying the financing since July. Citigroup Inc. found buyers for $1 billion of loans to Allison Transmission Inc., the auto- parts supplier owned by Carlyle Group LP and Onex Corp.

``The door creaks slowly open in credit markets,'' Bank of America strategists led by Jeffrey Rosenberg said in a research note. ``Clearly credit conditions have improved.''

Banks returned to the market as investor confidence in high-risk, high-yield loans climbed to the highest in two months, according the benchmark iTraxx LevX Index of credit- default swaps on European loans. Goldman Sachs Group Inc., the world's biggest securities firm, Lehman Brothers Holdings Inc. and Bear Stearns Cos. all say the worst credit-market shakeout since 1998 is abating.

Banks in the U.S. and Europe still have to syndicate the equivalent of almost three-quarters of the entire $500 billion of leveraged loans held by money managers in America, according to the research published Sept. 22. The amount they need to raise exceeds the $357 billion of high-yield bonds and loans issued by U.S. and European companies in the fourth quarter of last year, Bloomberg data show.

No Fire Sales

Banks have to offer discounts to convince investors to buy their debt. First Data's banks cut their price to 96 cents on the dollar to attract enough investors. The underwriters are still holding $17 billion of the Greenwood Village, Colorado- based company's debt. First Data said it expects its $26 billion takeover by KKR to be completed today.

``Banks are getting some of their overhanging debt away, albeit piecemeal,'' said Fiona Hagdrup, who helps manage 2 billion euros of high-yield loans at M&G, the fund-management arm of U.K. insurer Prudential Plc. ``Most banks are peddling the message that they're fine and no fire sales are needed and so far, they seem to be sticking to this.''

Investors are charging an average 3.25 percentage points over the London interbank offered rate for high-yield loans, up from 2.58 percentage points at the start of the year, according to Standard & Poor's LCD.

U.S. banks have sold $12 billion of leveraged loans in September, according to S&P, compared with $50 billion in June.

Alliance Boots

Banks underwriting the financing for LBOs commit to raise the money and earn fees to compensate for the risk of having to take on any debt they can't sell to a wider group of investors. They have to mark down the value of the debt and assume a loss if the price of high-yield loans falls below 100 percent.

Deutsche Bank AG shares fell 2.5 percent today after Reuters reported it may have to write down as much as 1.7 billion euros ($2.4 billion) of leveraged loans that it can't sell during the third quarter. The stock is down 11 percent this year.

Deutsche Bank led eight banks left holding 6 billion pounds ($12 billion) of loans to finance the takeover of U.K. pharmacy chain Alliance Boots after they couldn't find buyers on July 25.

U.K. financier Guy Hands' Terra Firma Capital Partners Ltd. last week started seeking 2.3 billion euros for its German highway services chain, Autobahn Tank & Rast Holding GmbH.

``Sentiment has improved dramatically,'' said Louis Gargour, chief investment officer of London-based hedge fund LNG Capital LLP. ``It doesn't mean the credit markets are out of trouble.''

To contact the reporter on this story: Cecile Gutscher in London at cgutscher@bloomberg.net

Last Updated: September 24, 2007 12:13 EDT