Yesterday it was Endemol, the day before it was Cadbury, and the day before that it was Sainsbury’s. In the current market, not a day goes by without news that the financing of another high-profile acquisition or buyout has run into trouble.

And while it is the big-name private equity firms such as KKR behind the acquisitions, it is the banks that are feeling the pain.

What is clear is that the collapse of the US sub-prime mortgage market has wreaked havoc in the leveraged loans sector, as banks such as Citigroup, RBS and JPMorgan have suddenly found themselves stuck with billions of dollars worth of underwritten but as yet unsyndicated loans.

And it is not just private equity that has been affected. Such is the chaos in the credit markets that spreads on high-grade corporate bonds have also widened, indicating that the bonds of safe-haven firms such as General Electric are seen as higher risk. Several corporate bond issues have been put on hold as companies decide it is safer to sit on the sidelines and wait for the markets to calm down before dipping their toe in.

Now, the European Commission is set to investigate the credit ratings agencies amid growing unease about their alleged slow response to the sub-prime mortgage crisis. Brussels officials believe the agencies should have moved more quickly to warn about the risks of investing in securities backed by US sub-prime mortgages. Charlie McCreevey, the EU internal market commissioner, met executives from S&P last month to express his concern.

The banks’ problem is that the investors who used to queue up to buy the high-risk loans – the so-called CLOs and CDOs – have now all but disappeared. Those that are prepared to buy will do so only in the secondary market, where the debt has been syndicated and is trading way below par, representing huge discounts for any investor brave enough to snap it up.

Compounding the problem, the number of CLOs – even if they were prepared to buy – has also fallen dramatically because it is the banks who create the packages of debt, called collateralised loan obligations – and sell them on to fund managers to run. The result is a vicious circle. As the banks have stopped lending, the number of CLOs has fallen and with it, the number of investors available to buy the bank debt has tumbled, too.

The only way that the debt can get sold is if banks sell it at a huge discount, as happened in the case of Alliance Boots. Deutsche Bank, JPMorgan and UniCredit were forced to sell the £750 milllion mezzanine portion at 95p in the pound. The rest – more than £8 billion – is still on their books.

The hope is that the market will calm down over the summer and that when everyone returns in September, some of the backlog will begin to get shifted. But that will not happen overnight. Some of the deals will need repricing only, like the Alliance Boots deal, but some will also need restructuring. A case in point is KKR’s acquisition of Maxeda, the Dutch retail group. The deal featured the use of so-called “stretched senior debt”, which meant that the amount of senior bank debt in the transaction was much higher than normal because it was so cheap. However, as senior debt has become much more expensive, it is going to be impossible for the banks to syndicate those loans without first restructuring them in a way that’s palatable to investors.

The worst-case scenario for the banks is underwritten deals that need repricing and restructuring and where the underlying company is seen as a risk. One example is the acquisition of EMI as an example of where the lending banks could cut the price and restructure the debt to make it attractive. But fears over the erosion of EMI’s core recorded music business mean that investors may still refuse to get involved. “Then you can’t redistribute it,” one head of leveraged finance at a Wall Street bank in London said.

The biggest worry is what happens if turbulence in the markets starts to tip over into the wider economy and consumer spending starts to get hit. Any number of leveraged buyouts could start to underperform, making it impossible to syndicate the loans.

Although default rates are at record lows, bankers are on edge after Wal-Mart’s profit warning sent a further chill through global markets this week. As one banker said: “In a market of no defaults, what happens when you get one, then one more? The market just isn’t prepared for that right now.”

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