Jan. 24 (Bloomberg) -- Banks are unable to find buyers for a $230 billion backlog of high-yield, high-risk debt, freezing leveraged buyouts and raising the risk of more writedowns on Wall Street.

Lenders have about $160 billion of so-called leveraged loans and $70 billion of junk bonds that they underwrote last year for companies including casino operator Harrah's Entertainment Inc., according to Bank of America Corp. analyst Clemens Mueller in New York. They were stuck holding the debt as the collapse of the subprime mortgage market in the U.S. drove investors from all except the safest government securities.

Banks including Citigroup Inc., Goldman Sachs Group Inc., and Morgan Stanley are struggling to unload debt from last year's record $438 billion of leveraged buyouts. The market for high-yield bonds has been shut since July in Europe and sales in the U.S. slowed to $850 million this year from $6.3 billion in the same period in 2007, data compiled by Bloomberg show.

``Getting debt is very difficult,'' David Rubenstein, co- founder of Washington-based buyout firm Carlyle Group, said in an interview today at the World Economic Forum annual meeting in Davos, Switzerland. ``The leveraged buyout business that we've known for the past five years, doing large leveraged buyouts, that business is gone for a while.''

Buyout firms finance acquisitions by borrowing about two- thirds of the cost, piling debt onto the company being purchased. The debt is typically rated below Baa3 by Moody's Investors Service and BBB- by Standard & Poor's.

Depreciating Asset

Banks with LBO debt are holding a depreciating asset. The average price for the most actively traded loans monitored by S&P declined 1.65 cents this week to 91.14 cents on the dollar, down from 100 cents, or full face value, in June.

JPMorgan Chase & Co., the biggest arranger of U.S. leveraged loans last year, wrote down the value of $26.4 billion of unsold loan commitments by an amount ``in excess'' of 6 percent, or $1.5 billion, in the fourth quarter, according to a Jan. 16 investor presentation on its Web site. Citigroup, the biggest U.S. bank, included costs of $1.35 billion on leveraged- buyout loans when it reported earnings in October.

Banks reduced the backlog by 32 percent in the second half of last year, Bloomberg data show, as lenders sold some bonds at a discount of 10 percent to face value and loans at 5 percent below par, according to London-based Barclays Plc.

Bank of America, located in Charlotte, North Carolina, and Frankfurt-based Deutsche Bank AG last week began selling $3 billion of loans that funded the acquisition of Las Vegas-based Harrah's by Apollo Management LP and TPG Inc. at a discount of 3.5 percent. The Harrah's loan pays interest 3 percentage points above the three-month London interbank offered rate.

Highest Margins

Investors are charging buyout firms interest 4.03 percentage points above interbank rates, the highest average margin in five years, according to Standard & Poor's.

The backlog of unsold debt is likely to hinder lending, according to Bank of America's Meuller.

``With highly volatile secondary markets and high-yield spreads having widened to levels not seen since 2003,'' sales of bonds and loans are ``very challenging,'' Mueller wrote. Debt financing leveraged buyouts ``represents the lion's share of calendar volume.'' Mueller declined to comment further when contacted by phone today.

The Markit LCDX Index, a gauge of confidence in the U.S. leveraged loan market that rises as confidence improves, climbed 0.05 to 94.30 today, after reaching a record low of 92.2 on Jan. 22, according to Goldman Sachs Group Inc. The drop below 100 indicates leveraged loans are trading for less than face value.

In Europe, the Markit iTraxx LevX Senior Index of 26 high- yield loans rose 1 to 94.5, according to Morgan Stanley. The index touched a record low of 92.5 in July last year.

``The best private equity investments of all times are made when there's time of uncertainty and stress, and right now that exists,'' Carlyle's Rubenstein said.

To contact the reporter on this story: John Glover in London at johnglover@bloomberg.net

Last Updated: January 24, 2008 12:24 EST