Nov. 4 (Bloomberg) -- JPMorgan Chase & Co. agreed to provide as much as $2.85 billion to finance Denbury Resources Inc.’s purchase of Encore Acquisition Co. in the biggest leveraged-loan commitment by a single bank this year.

The transaction consists of a $1.6 billion revolving credit line and a $1.25 billion bridge loan, Fort Worth, Texas-based Encore said yesterday in a regulatory filing. Denbury’s size will double with the biggest U.S. oil and natural-gas acquisition of 2009.

JPMorgan’s loans surpass the $2.5 billion credit facility Morgan Stanley said it will arrange to back CF Industries Holdings Inc.’s hostile bid for Terra Industries Inc., indicating that banks are beginning to use their balance sheets again to finance acquisitions.

“It’s another sign of the improving risk appetite,” Pri de Silva, banks and brokers analyst at debt research firm CreditSights in New York, said in an interview. “For a good part of the last two years, the leveraged-loan market was in hibernation with lenders for the most part looking to back away from commitments.”

The loan package is second only to the $3.2 billion arranged by six banks including JPMorgan and Morgan Stanley to back Warner Chilcott Plc.’s acquisition of Procter & Gamble Co.’s prescription-drug unit, according to data compiled by Bloomberg and Standard & Poor’s Leveraged Commentary and Data.

Market Collapse

Leveraged lending markets collapsed in 2007, leaving banks including JPMorgan stuck with billions of dollars of loans to speculative-grade companies, restricting their appetite to back new takeovers. Leveraged buyouts of more than $2 billion all but disappeared as lending to high-yield, high-risk borrowers, rated below Baa3 by Moody’s Investors Service and less than BBB- by S&P, dropped 88 percent to $99.2 billion in 2009 from a record two years ago.

There will be a divergence between banks willing to participate in leveraged lending in “a big way” and others that are still building up their capital bases and seeking to get out of government control, said de Silva of CreditSights.

“The ability to extract fees and get a decent spread is the business rationale for doing this” he said in reference to the JPMorgan and Morgan Stanley deals, where each bank was the sole lead arranger.

JPMorgan, the second-biggest lender to junk-rated companies this year behind Bank of America Corp., decided in the second quarter of 2008 to separate loans made in 2007 from corporate lending in following years.

Legacy Loans

After completing its acquisition of Bear Stearns Cos. in April 2008, JPMorgan’s so-called legacy loans had climbed to a peak of $44 billion, Chief Financial Officer Michael Cavanagh said April 16 on a call with analysts to report first-quarter results. Leveraged-loan holdings dropped to a market value of $2.2 billion, about 40 percent of face value, he said on an Oct. 14 conference call to discuss the New York-based bank’s third- quarter results.

Denbury, based in Plano, Texas, said it will buy Encore for about $4.5 billion to add fields in the Rocky Mountains and Gulf of Mexico. Encore stockholders will get $50 a share, consisting of $15 in cash and $35 in Denbury common stock, the companies said Nov. 1 in a joint statement.

The four-year revolver and one-year bridge facility will be used to pay for the cash portion of the takeover, retire and replace Encore’s $825 million of subordinated notes with a change of control put option of 101 cents on the dollar, and retire the company’s $180 million of outstanding bank debt, according to yesterday’s filing.

Encore said the bridge facility will be available if Denbury doesn’t secure other funding. Any amount owed under the facility after the first year will convert to a loan maturing seven years after the merger closes, the company said.

To contact the reporter on this story: Emre Peker in New York at epeker2@bloomberg.net.

Last Updated: November 4, 2009 14:55 EST