The availability of “covenant-lite” loans has all but evaporated in Europe as banks turn off the credit tap.

The disappearance of easy credit is believed to have affected the ability of the banks financing the buyout of Alliance Boots by Kohlberg Kravis Roberts (KKR) and Stefano Pessina to sell on the debt.

Over past two weeks covenant-lite loans, beloved by private equity firms for their relaxed borrowing terms, have become almost impossible to acquire for all but AAA-rated borrowers, according to market insiders.

A source at one of the leading covenant-lite suppliers said: “All the big banks were doing cov-lite, but you bascially can’t do one right now.”

Sources close to the Alliance Boots deal admitted that the banks lending £9 billion to KKR and Mr Pessina had found it more difficult to obtain their desired syndication terms. Banks involved in financing the deal include Barclays Capital, UniCredit, JPMorgan, Deutsche Bank, Royal Bank of Scotland, Merrill Lynch and Bank of America.

This month Standard & Poor’s cut its long-term corporate credit rating on Alliance Boots from BBB to BB, which the ratings agency said reflected a “dramatic change in the group’s financial structure”. The about-turn came after a series of warnings from leading financiers about a dangerous relaxation of lending standards in Britain.

Under the terms of covenant-lite loans, borrowers can skip the quarterly tests usually demanded by lenders that compare a company’s cash flow with its level of outstanding debt.

About ten covenant-lite loans have been fully syndicated in Europe since May, when the deals first hit the headlines. Sara Halbard, portfolio manager at Intermediate Capital, the mezzanine finance house, said that banks with lead underwriting position on some of the cov-lite loans agreed before this month’s credit crunch were finding it difficult to syndicate them to other banks. “In the last ten days the risk appetite has shifted quite dramatically,” she said. “The pain is being felt at the underwriting bank level.”

Some lead banks are thought to be trying to renegotiate loan terms – in some cases, to reinsert covenants – or using their arrangement fees to sweeten terms for the lenders to whom they hope to syndicate the loan. Others may decide to keep the entire loan on their own books.

Between ten and fifteen loans are understood to be stuck in the lending pipeline as lead banks attempt to find buyers. The backlog is not expected to be cleared until September.

When underwriting begins again, legal experts expect loan terms to be “cov-loose” rather than covenant-lite. “We think we’ll see one or two maintenance covenants in them,” a banking lawyer said.

The financing of the purchase of Alliance Boots by KKR and Mr Pessina was expected to be an important test of the appetite for covenant-lite loans. The consortium began syndicating parts of its £9 billion borrowings last week. There is only one covenant, relating to the ratio of debt to earnings before interest, tax, depreciation and amortisation, on the senior debt.

Sources close to the deal said that the syndication remained attractive to lenders, despite current jitters in the credit market, because “the healthcare sector is counter-cyclical”.

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