March 19 (Bloomberg) -- U.S. banks from Goldman Sachs Group Inc. to Lehman Brothers Holdings Inc. have whittled their holdings of leveraged buyout loans to $129 billion from $163 billion at the beginning of the year by offering the debt at discounts, according to analysts at Bank of America Corp.

The decline is a ``ray of hope'' for banks amid a slump in credit markets and a slowing economy, said analysts led by Jeffrey Rosenberg. The firms also have $73.6 billion of high- yield bonds they need to sell, they said.

Banks have been breaking ranks from their lending groups and offering their own pieces of the LBO loans at as little as 80 cents on the dollar to get the debt off their books. New York- based Lehman yesterday said it has reduced its LBO backlog by $6.1 billion to $17.8 billion since the beginning of the year. Goldman Sachs halved its holdings to $20 billion and Morgan Stanley reduced its pipeline by 20 percent.

The buyout industry, including Blackstone Group, Apollo Management LP and Kohlberg, Kravis Roberts & Co., all based in New York, negotiated more than $370 billion in financing to back acquisitions such as the $32 billion purchase of Texas power producer TXU Corp. and the $46.8 billion sale of Canadian telecommunications company BCE Inc. to an investor group led by the Ontario Teachers Pension Plan, the largest buyout ever.

Plunging Demand

Investor demand for the debt plummeted in July as losses on U.S. subprime securities spread to other asset classes. The average price of a leveraged loan fell from par to a record low of 86.28 last month, according to Standard & Poor's data. Prices have since climbed to 87.32 cents on the dollar.

Banks began tackling the backlog in September, when lenders for KKR sold $9.4 billion of loans at a discount of up to 4 percent for its takeover of Greenwood Village, Colorado-based First Data Corp., the biggest processor of credit card payments.

Goldman, the world's biggest securities firm by market value, is selling its portion of Chrysler LLC's $7 billion in loans for as little as 72 cents on the dollar, said investors, who declined to be identified because the terms are private. Goldman spokesman Michael DuVally declined to comment on individual sales.

Cerberus Capital Management LP bought Chrysler Group LLC last August. Bankers for the Auburn Hills, Michigan-based automaker twice failed to sell the Chrysler loans. JPMorgan Chase & Co., Citigroup, Morgan Stanley, Bear Stearns Cos. and Goldman, all of New York, tried in November to sell $4 billion of the loans at 97.5 cents on the dollar.

The loan is priced at 400 basis points more than the three- month London interbank offered rate, or Libor, a borrowing benchmark. Three-month Libor is 2.6 percent. A basis point is 0.01 percentage point.

Backlogs Reduced

Goldman reduced its backlog of loans by $20 billion in the past quarter from $43 billion, chief financial officer David Viniar said on an investor call yesterday. The New York-based firm, which booked a loss of $1 billion on the loans, also added $4 billion of new commitments during the period.

Lehman, the fourth-biggest U.S. securities firm, booked losses of $500 million on leveraged loans last quarter, CFO Erin Callan said on a conference call with investors yesterday.

Morgan Stanley, the second-biggest U.S. securities firm, reduced its leveraged finance pipeline to $16 billion from $20 billion during the first quarter, CFO Colm Kelleher said in an interview today after the company reported first-quarter profit fell 42 percent.

Royal Bank of Scotland Group Plc, Morgan Stanley and Credit Suisse Group have each sought buyers for their portion of Clear Channel Communications Inc.'s $22 billion buyout financing, said people with knowledge of the situation.

LBO Buyers

Some of the same LBO firms that generated the debt in the first place are raising funds to buy it back at reduced prices. Blackstone raised a $1.4 billion fund last November to buy bank loans, and Leon Black's Apollo has bought $1 billion of distressed loans and bonds.

``The leveraged loan forward calendar continues to decline,'' Rosenberg wrote in the report on March 17. ``The ongoing raising of distressed debt funds,'' including Apollo's, ``appears to support these efforts.''

In addition to the buyout firms, traditional loan investors and hedge funds are also buying the debt.

Dallas-based Highland Capital Management LP has raised $1 billion in the past four months from pension funds and sovereign wealth funds, to invest in debt, including bank loans, according to Mark Okada, co-founder and chief investment officer.

``We are more willing to participate in new issues at these distressed prices,'' said Scott D'Orsi, a partner at Boston-based Feingold O'Keeffe Capital, which has $1.25 billion in assets. ``It's been a waiting game between the buy side and the banks over the past several months, with pricing moving in favor of investors.''

To contact the reporter on this story: Pierre Paulden in New York at ppaulden@bloomberg.net;

Last Updated: March 19, 2008 16:20 EDT