With bankers and private equity investors closely watching the loan market, a ray of hope appeared on Tuesday from the Allison Transmission deal.

A source told Reuters Loan Pricing Corp that Citigroup, Lehman Brothers, Merrill Lynch and Sumitomo Banking Corp. sold a $1 billion block of their previously unsold $3.5 billion bank loan for Allison Transmission at 96 cents on the dollar — which could help jumpstart the syndication of other deals. Banks know that they’re going to take a hit with the more than $300 billion of LBO debt they’ve got stuck on their balance sheet.

The question is, how big of a hit. Most banks would cringe at 90 cents on the dollar or lower, but suddenly, 96 cents doesn’t look so bad. Maybe there is hope for the pig in the python after all.

The Allison news comes as merger arbitrage spreads are tightening – meaning investors are continuing to bet that a number of high-profile LBOs will get done. Last month the spreads had widened when the credit crunch set in.

News that TXU cleared another hurdle and that KKR was willing to compromise on First Data terms likely brought in the spreads, which measure the difference between the current and offered price of an acquisition target. What may be driving the spreads on Tuesday is Allison hitting the “most significant pricing point for the loan market since mid-July,” according to Reuters LPC. 

A huge pile of LBO debt is still being held by banks and waiting for syndication. Allison’s loan sale could bode well for other syndications, but the market will dictate demand.