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LBO Window Begins to Close for Banks

NEW YORK ( TheStreet) -- Banks are struggling to offload more risky leveraged loans to institutional investors in a weak economic environment, which could be a potential roadblock for future deals.

"Two months ago our market was hot. Everyone was talking about how it was going back to 2006 levels. It was not really, but the feeling was any deal could get done" said Robert Polenberg, analyst at Standard and Poor's who covers the leveraged loan and high yield bond market. "Now deals of a $10 billion potential are out the window."

Leveraged buyouts -- private equity deals that are financed mostly by loans and high yield bonds -- have been seeing a steady uptick in activity, with total volumes in the first half of 2011 rising 8% to nearly $95 billion from a year ago, according to Dealogic.

Recent buyouts include BJ's Wholesale (BJ), which is being taken private by CVC Capital and Leonard Green in a $2.8 billion deal. Medical technology company Kinetic Concepts (KCI) is reportedly in talks to with an affiliate of Blackstone (BX) for a sale for nearly $5 billion.

While the sizes of the deals are nowhere near the mega buyouts of 2006, acquisitions in the $5 billion to $10 billion range have generally sailed through so far, as credit conditions eased since the peak of the crisis.

Even in mid-June, the Office of the Comptroller of the Currency warned that banks had begun to ease conditions a little too much on leveraged loans. "The pace of easing standards in products like leveraged lending is disconcerting and warrants close attention," Dave Wilson, the comptroller's chief national bank examiner, said in a statement. "We need to remember that overly liberal underwriting standards contributed to extremely high credit losses."

Bank of America (BAC - Get Report) and JPMorgan Chase (JPM - Get Report) are the biggest players in the leveraged loans space in the U.S>

But the tide has changed pretty quickly in recent weeks. Concerns over the sovereign debt crisis in Europe have made investors skittish about leveraged loans that are used to finance these buyouts. That could mean that banks are left holding the sizeable loans on their books.

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