Oct. 9 (Bloomberg) -- The value of high-risk, high-yield loans slumped amid speculation more than 1 billion euros ($1.4 billion) of debt being sold includes assets seized from Iceland's banks.

Brokers sent details of loans used to fund leveraged buyouts for sale to investors and traders, according to four people who saw the lists.

``There are several bid lists of leveraged loans circulating,'' said Louis Gargour, chief investment officer at London-based hedge fund LNG Capital, who is setting up a distressed debt fund. ``One is from an Icelandic bank and two are from leveraged hedge funds.''

Iceland took control of Kaupthing Bank hf, the nation's biggest lender, in an attempt to provide a ``functioning domestic banking system,'' the Financial Supervisory Authority said in a statement on its Web site today. The seizure triggered settlement of credit-default swaps protecting the bank's bonds from default, the third so-called credit event by the nation's banks this week.

Europe's Markit iTraxx LevX index of credit-default swaps on loans to 75 companies dropped to a record low of 87.5, from 92.75 yesterday, according to Deutsche Bank AG. The current series of the index started at 99 on Sept. 29. The Markit LCDX, the benchmark U.S. loan credit-default swap index, fell to an all- time low of 87.5, from 88.85, Goldman Sachs Group Inc. said.

Bank Debt

Iceland's banks have about $61 billion of debt, 12 times the size of the economy, according to data compiled by Bloomberg. Landsbanki Island hf and Glitnir Bank hf, the second and third largest banks, have already collapsed.

``There are going to be more and more leveraged loans being sold off by a variety of different investors in the coming days and weeks,'' said Charlotte Conlan, head of leveraged syndication at BNP Paribas SA in London. This ``will inevitably have a knock- on effect on the mark-to-market for the rest of the loan investor community,'' she said.

The LevX Index is based on credit-default swaps linked to companies including Alliance Boots Ltd., the U.K. drugstore chain owned by Kohlberg Kravis Roberts & Co., and Expro International Group Plc, the oilfield-services company bought by Candover Partners Ltd.

Credit-default swaps are financial instruments based on bonds and loans that are used to speculate on a company's ability to repay debt. They pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements. An increase indicates a deterioration in the perception of credit quality; a decline, the opposite.

The cost of protecting European corporate debt from default, measured by the Markit iTraxx Crossover index of 50 companies, soared to a record today, according to JPMorgan Chase & Co. High- yield, high-risk debt is rated lower than Baa3 by Moody's Investors Service and BBB- by Standard & Poor's.

To contact the reporters on this story: Neil Unmack in London nunmack@bloomberg.net; Caroline Hyde in London chyde3@bloomberg.net

Last Updated: October 9, 2008 13:30 EDT