Oct. 10 (Bloomberg) -- The value of U.S. and European high risk, high-yield loans fell to a record low as banks tried to sell holdings of the debt.

Markit LCDX, a benchmark credit-default swap index used to hedge against losses on U.S. leveraged loans, which falls as credit risk increases, dropped 2.5 percentage points to a mid- price of 82.75 percent of face value, paring an earlier decline to 82, according to Goldman Sachs Group Inc. The Markit iTraxx LevX index of European loans fell 2 to 86.5, Deutsche Bank AG prices show.

Prices of leveraged loans tumbled on concern that banks and hedge funds are being forced to sell assets in the wake of the collapse of Iceland's banks this week and the failure of Lehman Brothers Holdings Inc. in New York. Rapid declines in the value of loans will make it more expensive for companies to raise capital.

``Selling pressure is likely to continue as nobody really knows how many more loans are going to be dumped on the market,'' said Robert Jaeger, a high-yield debt analyst at Societe Generale SA in London.

Loan prices fell yesterday as Iceland took control of Kaupthing Bank hf, the nation's biggest lender, completing the nationalization of the country's top three banks. The seizure came as brokers sent details of loans used to fund leveraged buyouts for sale to investors and traders, according to four people who saw the lists.

``We are seeing the continued forced selling of leveraged loans across Europe,'' said Raja Visweswaran, a London-based trader at Asteri Capital Ltd. ``There is no credit-specific news out today, this is more the sign of a systemic meltdown.''

U.S. Falls

The price of the average actively traded U.S. leveraged loan has plummeted 17.3 cents to 71.1 cents on the dollar since Sept. 9, according to Standard & Poor's LCD. Average prices fell 3.5 cents since Oct. 7.

The LCDX index of loan default swaps is linked to the loans of 100 companies from automaker General Motors Corp. to newspaper chain Tribune Co. The LevX index in Europe is based on 75 companies including Alliance Boots Ltd., the U.K. drugstore chain owned by Kohlberg Kravis Roberts & Co., and oilfield services company Expro International Group Plc.

High-yield, high-risk debt is rated lower than Baa3 by Moody's Investors Service and BBB- by Standard & Poor's.

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.

To contact the reporters on this story: Caroline Hyde in London chyde3@bloomberg.net; Pierre Paulden in New York at ppaulden@bloomberg.net.

Last Updated: October 10, 2008 10:28 EDT