* Margin on a loan may go above 500 basis points - bankers

* IPO exit option severely limited in first half

By Stephen Aldred

HONG KONG, Dec 23 (Reuters) - Asia's private equity firms face a shrinking pool of bank loans as European lenders pull back from the region, crimping both investments and re-financings for buyout-backed companies and adding to the list of challenges the industry will meet in 2012.

In addition to tighter financing, Asia's private equity industry faces an IPO market that is virtually shut at a time when several funds are raising new money and need to exit previous investments.

Of the list of obstacles the sector faces next year, a smaller loan pool is the biggest challenge. The European bank retreat has gathered steam in recent months and has surfaced in several investments, including three struggling Asia-related private equity deals: Nine Entertainment, MediaWorks and GST Autoleather.

A strong run in the first half of this year saw private equity-backed Asia Pacific M&A volume hit its best figures since 2006 on volume of $33.2 billion, according to Thomson Reuters data. But fourth-quarter volume plunged 67 percent to $3.9 billion, the data show, as equity and debt availability dried up in the second half amid global economic turbulence fed by Europe's debt crisis.

"The reality is that a lot of European banks have pulled out and it really is having an impact on the market," said Lyndon Hsu, managing director and head of Asia Pacific leveraged and acquisition finance at HSBC.

Bank-sponsored buyout loans represent only a small portion of private equity activity in Asia, where buying minority stakes in the region's fast-growing companies is the dominant investment strategy.

Even though the Asia industry is mostly so-called growth capital, loans are still a key tool for the sector, especially in more developed economies such as Australia, Japan and Singapore.

Bank lending also plays a key role when private equity firms want to re-finance companies they own in an effort to pay back existing debt. The inability to re-finance will weigh more heavily on buyout firms as the economic slowdown is adding pressure on companies with heavy debt loads.

While banks are selectively lending, the amount available is much less than the beginning of the year and few banks are willing to go into a deal on their own.

Earlier this year, Hsu reckons that in non-Japan Asia, a firm could have done a $500 million to $700 million leveraged loan, but that is now down to $300 million to $500 million.

According to Asia loan market sources, the region is no longer seeing the type of lending activity it used to from European banks such as Bank of Scotland, BNP Paribas and Credit Agricole, plus Allied Irish Banks, Societe Generale and UniCredit.

"We're seeing far more banks withdrawing or being selective and 2012 will be even more so because they'll only put capital in for priority clients, for deals where they have to do it or they need to protect existing business," Hsu said.

INDUSTRY WOBBLES

CVC recently captured headlines when twice in one week it had to abandon plans to refinance $2.6 billion in senior debt at Nine Entertainment as banks continued to flee the asset and hedge funds intent on control raised their stakes.

Commercial banks, including BNP Paribas, Commonwealth Bank of Australia and Credit Agricole Commercial and Investment Bank sold around A$250 million ($253.30 million) of senior debt earlier this month, Reuters previously reported.

MediaWorks, a New Zealand broadcast company owned by private equity firm Ironbridge, is also struggling to-refinance debt.

That struggle came under further pressure when banks, including Allied Irish Bank, sold portions of its senior debt, according to media reports.

GST Autoleather, a U.S.-based company owned by Japan-focused private equity firm Advantage Partners, is also struggling to re-finance debt, with European and Japanese banks reportedly shunning the offer.

SMALLER AND MORE EXPENSIVE

Money is still available for private equity buyouts in Asia, bankers say, but the debt will cost more.

Thomson Reuters LPC estimates the average price for leveraged loans for the first three quarters of 2011 was 383 basis points.

Bankers say the margin on a loan now will be above 500 basis points. Fees will raise that price further to as much as 550 basis points.

"Investment-grade deals are close to 300 basis points in some countries, so there has to be a differential paid for leveraged deals," said John Corrin, global head of loan syndications at ANZ.

With little or no market to sell loans to and reduce their exposure, lender banks will stay cautious going into the new year. While banks could come out to lend for big deals, the ingredients have to be right.

"You've got to have a very good credit, a very good sponsor, enough banks who are involved in the underlying credit or sponsor, or both," said HSBC's Hsu.

• A Permanent Economic Emergency