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Bridge Loans Leave Bankers Quaking

The sun is shining on the stock market, but the bankers financing big leveraged buyouts are fretting over changes in an obscure corner of the debt market.

Investment banks like Goldman Sachs (GS), Merrill Lynch (MER), Morgan Stanley (MS) and Lehman Brothers (LEH) have been handing over billions of dollars in so-called bridge loan commitments to buyout-happy private-equity shops private-equity.

Bridge loans are hardly lucrative for investment banks -- they are not usually even drawn down. Instead they serve to "bridge" the gap between the announcement of a buyout by the likes of Blackstone Group (BX), Kohlberg Kravis Roberts and TPG Capital and the receipt of permanent financing.

But with the debt market having soured recently for leveraged buyouts, banks are starting to worry that private-equity shops might opt to actually draw upon these hefty loans -- possibly leaving the banks with billions of unwanted loans on their books, unless they can syndicate them out to buyers including hedge fund investors.

One senior investment banker, who declined to be identified, tells TheStreet.com that the situation is a serious concern since the debt market has turned choppy.

"You never want to see your bridge loan get drawn, but I fear we will see some bridge loans get drawn," says the banker.

Many deals, including February's $45 billion KKR-TPG plan to acquire TXU (TXU), were funded with bridge commitments through a cadre of banks eager to bag business with private-equity firms.

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