(Adds detail, background) by Mark Brown Of DOW JONES NEWSWIRES LONDON (Dow Jones)--Lloyds Banking Group PLC (LLOY.LN) of the U.K. has sold bonds worth nearly GBP550 million backed by loans to U.K. small and medium-sized enterprises, in the latest sign that the market for bonds backed by loan repayments is recovering. Issuance of such bonds reached EUR27.4 billion in Europe in the first half of this year, according to figures from Societe Generale, but has overwhelmingly consisted of bonds backed by residential mortgage and auto loan repayments. Two tranches of bonds rated Aaa by Moody's Investors Service--a GBP350 million tranche and a EUR235 million tranche--were pre-placed with a small group of investors from the U.K. and Europe, a Lloyds spokeswoman said. The sterling-denominated bonds pay a coupon of 175 basis points over three-month sterling Libor, and priced at 99.44. The euro-denominated bonds pay 150 basis points over three-month Euribor, and priced at 99. Both these tranches have a weighted average life--the time a bondholder can expect to wait before their principal is repaid--of three years. A EUR60 million Aaa rated tranche, a GBP110 million Aa3 rated tranche, and two unrated tranches totalling GBP154.2 million, were retained by the issuer. The euro-denominted retained tranche is guaranteed by the European Investment Fund, or EIF, the part of the European Investment Bank that specialises in providing SME finance across Europe. The notes were issued by a collateralized debt obligation, or CLO, called Sandown Gold PLC. They are backed by a static pool of 1,733 loans, worth GBP807 million, to 1,407 borrowers, originated by Lloyds TSB Bank. The loans range in size from GBP25,000 to GBP5.5 million. CLOs issue bonds serviced with the payments made on corporate loans. The bonds are divided into slices with varying credit risk. Demand for bonds backed by repayments on other credit assets all-but-disappeared in 2007 following the collapse of the U.S. subprime mortgage market. Plunging prices and the inability of banks to issue new bonds were a major cause of the financial crisis. Recovering investor appetite enabled the European market for asset-backed securities to reopen last year, and in the U.K., Lloyds issued the first residential mortgage-backed securities sold to investors in more than 12 months last September, via its Permanent RMBS program. Lloyds has subsequently sold more RMBS, as well as bonds backed by credit card repayments, but Sandown Gold is one of the first deals backed by U.K. corporate loans since the crisis. "It is good to see a different asset class getting done, although the market will only be seen to have recovered when investors start buying the riskier tranches of these deals," said one portfolio manager. An analyst said the pricing on the deal "looks fair." A recovery in the market for asset-backed securities is seen as a key way to support bank lending to consumers, households and businesses, and thus support the economic recovery. Supply remains well below pre-crisis levels, but has increased from 2008 and 2009. -By Mark Brown, Dow Jones Newswires; + 44 (0)207 842 9485, mark.brown@dowjones.com (END) Dow Jones Newswires July 13, 2010 13:03 ET (17:03 GMT)
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