Is that light at the end of the tunnel or just another false dawn? Leveraged finance teams certainly hope the latest attempts to unblock the leveraged finance market, as institutions such as Citi and Deutsche Bank put together deals to sell off their leveraged loans portfolio, will start to get things moving.

But acquisition finance counsel, probably the City lawyers hardest hit by the prolonged turmoil in credit markets, are feeling too edgy to get hopeful just yet. After all, hopes of a revival emerged in October as debt was moved on two flagship deals – First Data and Alliance Boots N and credit spreads began to narrow. But it was not long before gloomy US economic news and a string of fresh bank writedowns took their toll, largely closing the market for £500m-plus mandates.

Given estimates that banks need to sell on at least £60bn in leveraged loans in Europe, kickstarting the secondary market will be of vital importance.

In the meantime, it is clear that leading leveraged buy-out (LBO) teams such as Clifford Chance (CC), Allen & Overy (A&O) and Linklaters are operating below their capacity.

Nevertheless, there are hopes, after a string of fresh writedowns and the rescue of Bear Stearns, that the foundations for a slow revival can now be laid as buyers return to the market to pick up discounted loans and banks move to free up their balance sheets.

Lovells finance partner Matthew Cottis (pictured) believes mooted deals like Deutsche and Citi, respectively reported to be covering €36bn (£29bn) and $12bn (£6bn) worth of debt, will help the LBO market. He says: "Private equity groups will help to buy leveraged debt and banks will begin to shift funds in order to move forward."

Unsurprisingly, sponsor counsel such as Kirkland & Ellis see interest from private equity houses as one hope for rebuilding the market. Kirkland partner Stephen Gillespie comments: "Banks are now offering sponsors the chance to buy back leveraged debt. Credit is difficult to come by and we will see a lot of sponsors buying debt."

In the meantime, the market as it stands is divided into two areas in which deals can be done: mid-market deals around £300m and a handful of larger mandates for borrowers with strong credit stories.

"The bank market is not completely closed. Well-structured deals in the right sectors are still going through," says A&O banking heavyweight Tim Polglase.

"The high-end leveraged financial market has limited capacity and most of the activity is mid-market level around £300m," agrees his A&O colleague, Trevor Borthwick.

The nature of the deals has also changed, with lending for commodity and some infrastructure borrowers among the few sectors still open to £500m-plus funding.

This was underlined by this month's acquisition of UK oilfield service provider Expro International by Candover, which is being backed by debt from Royal Bank of Scotland, HBOS, HSBC, Lloyds TSB and Royal Bank of Canada (see page 64).

This year also saw a £900m buy-out of Scottish oilfield services company Abbot Group by First Reserve, with Simpson Thacher & Bartlett's London arm advising the sponsor on finance.

"Oil service deals are the flavour of the month," says Polglase. "The key is to focus on where the liquidity is and that includes the Nordic region and the emerging markets."

The increasing pace of the economy in places such as Russia, the Middle East and Asia is also seeing firms scrambling to get lawyers out of London, says CC's James Johnson: "We cannot get people out there fast enough."

One further consolation for advisers is that deals have become more work-intensive. This is because banks, when still leading, are pushing for tougher covenants and documentation and sponsors, sitting on substantial funds to invest, are still pressing to close deals.

"The deals are quirky now," observes Borthwick. "They are structured differently with more complication."

Nevertheless, few LBO lawyers have any illusions that there will be a quick return to normal conditions, even if current attempts to get debt moving on the secondary market are successful. Opinion among lawyers is largely divided between those who believe there will be a notable improvement in workflow after the summer and those counting instead on the first half of 2009.

Of interest also will be whether this week's massive liquidity programme from the Bank of England, which will allow banks to swap mortgages-backed securities for gilts, will help mend the inter-bank lending market (see page 3).

Gillespie warns to not expect quick fixes: "It is a tough environment and generally there is no bright news on the horizon."

More deal news