Loan rangers

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: trade at 70-80% of face value. Only a few big deals have been made public: Citigroup’s sale of $12 billion of debt to TPG, Blackstone and Apollo, for instance. But behind the scenes the activity has been frenzied.

Chris Taggert, of CreditSights, a research firm, estimates that the overhang of LBO loans that banks are waiting to sell on to investors has shrunk by $192 billion from the peak, to just $45 billion today. That chimes with the banks’ own disclosures. An analysis by The Economist suggests that the amount of corporate junk debt on the balance sheets of ten of the largest banks in the loan markets had fallen by $205 billion, to $163 billion at the second quarter.

Hoovering up these loans makes sense in some ways. Buy-out firms are familiar with the debtor companies—they probably either control them or cast an eye over them during the boom. And the banks are so desperate to get these loans off their books that they provide financing, typically two-thirds of the purchase price, at low interest rates.

Take the high yields on the distressed loans and supercharge them with cheap debt and the internal rates of return look impressive. Blackstone has said it expects returns of 20-30% on the equity it has invested in LBO loans.

Yet there are risks, too. In buying LBO loans, the industry is doubling up its bet on a small pool of companies. Executives may believe in these businesses, but many of them are too indebted to cope with a downturn. Lately, the economy “has become a much higher concern” for loan traders, says Mr Taggert, which perhaps explains why loan prices have not recovered as the overhang of supply has shrunk. Most of the bank-financing packages stipulate that, if prices fall further, private-equity firms must post margin calls. And if the companies need to be recapitalised, it could lead to some toxic conflicts of interest—should debt investors be favoured over old equity investors? Can money raised for new buy-outs be used as equity to bail out old ones?