The move is a rare example of European banks teaming up with one of the many private equity houses and hedge funds circling the continent's financial system in search of opportunities to snap up assets from capital-starved lenders.
Investment bankers say this year's asset quality review and stress tests that the European Central Bank is carrying out are likely to prompt more of the continent's lenders to sell assets, something they have resisted until recently.
Tuesday's announcement is expected to say the four groups have signed a memorandum of understanding but are still working out many of the details, although the vehicle could house several billion euros of loans.
UniCredit and Intesa are considering how much of their bad loan portfolio to shift into the vehicle and whether to contribute fresh funds themselves. The banks could not be reached for comment, while Alvarez & Marsal and KKR declined to comment.
UniCredit last month became the first Italian lender to set up an internal bad bank, housing 87 billion euros ($120 billion) of Italian loans, two-thirds of which are impaired. It said that nearly 55 billion euros of the loans would be run down by 2018.
Read MoreUniCredit to 'focus on growth' after shock loss
Intesa followed suit a couple of weeks later by saying it was putting 46 billion euros of assets into an internal bad bank, which it aims to reduce by half over the next four years. Both banks took big write-downs on their bad debts that dragged them deep into the red for the full-year.
Investor sentiment about Italian banks has improved recently, as fears of a euro zone sovereign debt crisis have faded and the country's economy has shown some signs of a nascent recovery.
Alvarez & Marsal was founded in 1983 to advise troubled companies on restructuring and is best known for its work on restructuring Arthur Andersen and Lehman Brothers after they both collapsed.
KKR has moved into distressed debt as part of its diversification away from buyouts in the past four years. KKR Asset Management, its corporate credit investment arm, has $14.8 billion of assets under management and this year the private equity group raised $2 billion for a new special situations fund to invest in distressed companies.
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