If banks do manage to sell BCE buyout debt later this month, they're going to have to jump through some interesting hoops.

Four banks, led by Citigroup, are planning to unload a portion of the $35-billion they will lend to the Ontario Teachers Pension Plan and its partners on the largest leveraged buyout ever attempted. Given the somewhat insane condition of credit markets, that syndication effort seems doomed to failure, but as of now, that's the plan.

The $17.9-billion (U.S.) Clear Channel Communications buyout, and debt sale that followed, is held out as an example of what might happen with the BCE buyout package.

Lenders marked down the price of Clear Channel junk bonds to 70 cents on the dollar and managed to unload $228-million of this debt back in September. That was less debt than the banks anticipated selling, but better than nothing.

But here's where hoops need to be cleared. Hedge funds bought the bulk of those Clear Channel bonds. These hedge funds were tight on cash, or needed loans for leverage. So the banks lending to Clear Channel turned around and made new loans to hedge funds, to finance the purchase of Clear Channel debt.

Think about those new loans. In addition to a hefty loss on the sale - the Wall Street Journal put the haircut for lenders at $68-million - the banks strapped on new credit risk, to hedge funds. As you may have noticed, hedge funds are shutting down left and right. No bank is looking for new exposure to high-yield hedge funds, yet that's the price that needs to be paid to sell off BCE exposure. 

The dilemma now facing BCE's lenders - Citi, Deutsche Bank, Royal Bank of Scotland and Toronto-Dominion Bank - is whether to push forward with a massive debt sale in the worst credit market since the ‘30s, with all the new lending risks that may bring. The alternative is to shoulder the entire loan package, and hope to eventually parcel it out in better days.

The stock market, of course, is saying this whole buyout is unlikely to close, as scheduled, by Dec. 11. BCE shares touched a 52-week low of $31.75 (Canadian) Wednesday on the TSX, then bounced back to close at $33.35. Royal Bank of Scotland's woes, and the British banking bailout, are the latest reasons to doubt the deal comes to pass as expected.

BCE trades at a massive discount to the $42.75 offered by Teachers and its backers, Providence Equity Partners, Madison Dearborne and Merrill Lynch.

There are three main tranches of debt that come with the BCE buyout, all of which were rated by DBRS on Tuesday. The credit rating agency handed the $23.05-billion term and revolver loan package at an investment grade of triple-B (low), while the $7.5-billion senior bridge loan is at double-B (low) and the $3.8-billion subordinated bridge loan is rated single-B.

A note Wednesday from TD Waterhouse pointed out price of existing Bell Canada debt actually rose after DBRS commented that outstanding, pre-buyout bonds have “outstanding prospects for full recovery” in a default.