(Bloomberg) -- Lloyds Banking Group Plc is selling a significant risk transfer linked to around £1 billion ($1.3 billion) of UK mortgages, which have been subject to modifications such as term extensions, according to a person familiar with the matter.
Lloyds is seeking credit protection on a portfolio of home loans, which are mostly performing but are subject to high regulatory capital charges because they were previously delinquent, said the person, who asked not to be named because the deal is private. The transaction, which may be priced in coming days, also includes a portion of mortgages currently in arrears, the person said.
Terms of the transaction, including size, are subject to discussion with investors. A representative for Lloyds declined to comment.
SRTs enable banks to hold onto loan assets and offload the risk by paying investment firms to share any potential future losses. Usually, a bank would obtain default protection for as much as 15% of portfolios, and in return investors can receive yields that frequently top 10%.
Banco Santander SA is also selling an SRT linked to a portfolio of UK home loans, as part of at least a dozen of such deals the Spanish bank has in various stages of the sale process, Bloomberg reported Nov. 21.
SRTs are often configured as credit-linked notes that enable banks to free up capital they’d otherwise have to use to insure their own loans. Lloyds’ core equity tier 1 ratio, a solvency metric closely watched by investors and regulators, was at 14.3% at the end of the third quarter compared with 14.6% a year earlier, according to an Oct. 23. presentation.
Loans tied to SRTs have reached about $1 trillion, with such deals running at a record pace for the fourth straight year, according to data compiled by Chorus Capital Management.
--With assistance from Helene Durand.
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