The world’s investment banks have spent recent years gorging from the troughs of private equity. The cash-rich buyout firms provided them with tens of millions of dollars of fees and in return they lent them more and more money. As the debt piles grew higher and the covenants grew lighter, many in the industry secretly had been steeling themselves for the mother of all corrections. And then it came.

As news of the sub-prime mortgage crisis began to seep through the markets, investors who previously had gobbled up the buyout loans got nervous and very quickly sought the safety of assets such as government bonds. Overnight, the party was over and the banks awoke to find themselves holding more than $400 billion (£198 billion) of loans used to back buyouts. In Europe, €80 billion (£54 billion) of loans have been left on banks’ balance sheets, underwritten but as yet unsyndicated. The carnage is worse across the Atlantic, where $280 billion has been left hanging.

While the eye of the credit storm has moved to new areas such as conduit funds and SIV-lites, the pace of the recovery will depend to some degree on how quickly the banks can push the backlog of loans into the market and at what price – in essence, how quickly the pig will pass through the python. But several things need to happen before that process can get under way.

First, everyone needs to come back from their summer holiday and in America, that will not really happen until after Labor Day on September 3.

Then prices in the secondary market need to stabilise and rise. Until that happens, investors will continue to buy debt below par, for 90p or 95p on the pound, and will shun new issues being sold at par.

Even when the market opens up, buyout firms will need to take a cold, hard look at their deals. Most of the debt will need to be repriced at serious discounts and restructured to get investors to buy in. And tougher covenants will be needed.

Some firms have taken that on board and have managed to get their deals away. Others, including Kohlberg Kravis Roberts, with its acquisition of Alliance Boots, have refused to soften terms enough, leaving the banks stuck with about £8 billion of loans priced and structured in the heyday of the credit boom.

Assuming that everything is repriced, one scenario is that all the banks flood the market with loans at the same time, causing a severe blockage. That seems likely, given that several big Wall Street banks will want to clear their books before their fiscal year ends in November.

Bob Diamond, president of Barclays and chief executive of Barclays Capital, its investment banking division, reckons that it could take “a month or so” for the backlog to be cleared. Others seem to think that it will take several months, well into the first quarter, for all the loans to be sold.

Only then will private equity be able to get back on a buying path – but the world will be a very different place. Debt will be more expensive and much less of it will be available. Investors will demand water-tight guarantees before they go anywhere near a leveraged buyout. The orgy is definitely over. Until the next time.

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