May 15 (Bloomberg) -- Deutsche Bank AG, Citigroup Inc. and Royal Bank of Scotland Group Plc are selling at least 2 billion pounds ($3.9 billion) of loans that funded the leveraged buyout of Alliance Boots, the first deal frozen when credit markets began seizing up in July.

Apollo Management Inc. and Blackstone Group LP agreed to buy some of the debt that financed Kohlberg Kravis Roberts & Co.'s 11 billion-pound takeover of the Nottingham, England-based pharmacy chain, said two people with knowledge of the sale, who declined to be identified because the talks are private. The banks offered to help the LBO firms pay for the purchase and cut the price of the loans to 91 percent of face value, they said.

Deutsche Bank and seven other lenders failed in July to find buyers for 8 billion pounds of loans used for the takeover of Boots, Europe's biggest LBO, marking the beginning of a global credit crunch that saddled banks with $230 billion of loans and contributed to $337 billion of losses and writedowns. Banks are taking advantage of a 7 percent rise in the average price of high-yield, high-risk loans since February to cut the overhang of debt on their books to $95 billion.

``Boots is a big benchmark transaction that was done at the top of the market,'' said Vivek Tawadey, head of credit strategy at BNP Paribas SA. ``The fact that it's being sold is certainly a positive sign,'' though ``it will crystallize a loss on the balance sheets of the selling banks,'' he said.

Fees

The loans will be allocated and final prices set this week, the people said. Oonagh Baerveldt, a London-based spokeswoman for Deutsche Bank, and Apollo spokesman Steven Anreder declined to comment. An official at New York-based Blackstone also didn't provide a comment.

Buyout firms borrow about two-thirds of the financing needed for acquisitions and underwriters earn fees for the risk of holding any of the debt they can't sell to investors.

The loans are ranked as high risk, and receive ratings below Baa3 from Moody's Investors Service and BBB- from Standard & Poor's.

At the height of the bull market for credit in early July, banks agreed to provide loans to KKR for an interest margin of 2.75 percentage points higher than the London interbank offered rate, or Libor. They also gave up their rights to restrict spending and access financial reports by structuring the deal as a so-called covenant-lite loan.

The underwriters struggled to sell the loans as the credit crisis triggered by the worst U.S. housing recession in a quarter-century reduced prices for similar debt to an average 86.3 percent of face value, according to S&P data.

Market Recovery

The revived sale comes amid a recovery in the past three months that raised leveraged loan prices to 92.42 percent and cut the interest margin over the London interbank offered rate, or Libor, to 349 basis points, or 3.49 percentage points, according to S&P.

Credit-default swaps on Boots bonds dropped 11 basis points to 580 basis points, the lowest in more than three months and down from a peak of 820 basis points in March, according to CMA Datavision prices at 4:35 p.m. in London.

The contracts pay the buyer face value in exchange for the underlying securities or the cash equivalent should a company fail to adhere to its debt agreements. A fall signals improvement in the perception of credit quality; a rise, the opposite.

Wall Street chief executive officers from Lehman Brothers Holdings Inc.'s Richard Fuld to Lloyd Blankfein at Goldman Sachs Group Inc. and John Mack at Morgan Stanley asserted the worst of the crisis may have passed.

Turmoil

A measure of bank borrowing costs indicates the turmoil has eased. The so-called TED spread between three-month Treasury yields and the three-month Libor dropped to 90 basis points, from 147 basis points two weeks ago and 203 basis points in March.

Investors reduced the extra yield to buy high-risk notes, or junk bonds, to 6.54 percentage points over rates on similar- maturity government debt from a high this year of 8.53 percentage points in March, an index compiled by Merrill Lynch & Co. shows.

At least four of the eight banks that arranged the Boots loans in July agreed to sell some of the debt this week, the people said.

While investor sentiment has improved, the 9 percent discount offered by banks on the portions of Boots debt being sold will wipe out the 2 percent underwriter fees they collected last year.

Barclays Capital is among the lenders that aren't participating, according to the people.

``Where we have loans that are performing and where the company is performing well, and where the value is not being recognized, we are not going to sell at a loss,'' Barclays Capital's Chief Operating Officer Rich Ricci said in an interview today. He declined to comment on the Boots loan.

KKR Talks

Barclays, the U.K.'s third-largest bank, said it didn't include buyout loans in the 1.7 billion pounds of credit writedowns that caused a drop in first-quarter earnings today.

The buyout firms ``are taking the opportunity offered by a market dislocation'' and will resell the debt at a profit, said Paul Thompson, former head of lending services at HSBC Holdings Plc in London who is now a restructuring consultant. ``People make lots of money from doing that.''

The group of bankers for Boots had discussed selling the loans back to New York-based KKR, though no agreement had been reached, according to the people. Astrid Josephson, a London- based spokeswoman for KKR, wasn't immediately available.

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

Last Updated: May 15, 2008 12:27 EDT