Oct. 26 (Bloomberg) -- Lloyds Banking Group Plc, the U.K.’s biggest mortgage lender, is likely to sound out investors on a 22.5 billion-pound ($37 billion) investment package as soon as this week, according to a person with knowledge of the matter.

Lloyds will ask shareholders to buy 11.5 billion pounds of stock in a rights offering and present plans to convert 11 billion pounds of subordinated debt into equity, said the person, who asked not to be identified because the talks are confidential. Lloyds fell 7.2 percent to 89.34 pence in London.

“The shares are down on the expectation of the dilution- effect of the rights issue,” said Irfan Younus, an analyst at NCB Securities Ltd. in London who has a “sell” rating on the stock. “The key question is the discount that they will be offering the new shares at. The discount could be as high as 35 percent to 40 percent on the share price.”

The Treasury, which owns 43 percent of Lloyds, hasn’t decided whether it would exercise its rights to buy about 5 billion pounds of the shares, the person said. A final decision may come as soon as next weekend. The comments shed light on progress Lloyds is making in an effort to pull out of a Treasury program to insure 260 billion pounds of risky assets. Lloyds has said it may raise capital from investors instead of paying a 15.6 billion-pound fee to the Treasury for the insurance.

ING Restructuring Plan

Separately, ING Groep NV, the biggest Dutch financial services company, said it plans to raise 7.5 billion euros (11.3 billion) in a rights offering and sell its insurance operations to gain European Union approval for a taxpayer-funded bailout. Lloyds may also be forced to sell assets and branches by the EU for having received state aid.

The “readacross from ING” contributed to the decline in Lloyds shares, said Joseph Dickerson, an analyst at Execution Ltd. who has a “buy” rating on Lloyds. “It gives me greater conviction that Lloyds should exit the APS.”

The insurance program is one of the measures Chancellor of the Exchequer Alistair Darling unveiled in January to stabilize the banking industry after the Treasury took stakes in Lloyds and Royal Bank of Scotland Group Plc as credit dried up.

Lloyds chief spokesman Shane O’Riordain declined to comment on the rights offering.

Capital Need

For Lloyds to escape the asset protection program, it would have to tap financial markets for additional capital. That would force the Treasury to either buy new shares or see its stake diluted. A formal announcement may come Nov. 2, the person said.

Darling reached an agreement in principle for Lloyds to enter the asset-protection program in March and had wanted to tie up final details by July. Lloyds since then has said it was looking for alternatives to the program.

Other people close to the talks in recent days have said a final decision would be at least a week away, while another as recently as Oct. 22 said a decision would come in weeks rather than days. The talks between Treasury officials and Lloyds are continuing.

Darling wants guarantees from the bank that it has a strong enough capital base to withstand future economic shocks and for it to extend loans to households and companies hurt by the recession. He’s also attempting to make sure that taxpayer funds are used wisely.

Underwriting Banks

Separately, the Financial Times reported that Lloyds’s private-equity unit, LDC, is in talks to buy CPA Global for 400 million pounds. LDC is competing with Intermediate Capital Group Plc for the patent-and-legal-services group, and final bids are due next month, the FT said, without attribution.

The Lloyds share sale will be underwritten by UBS AG, Bank of America Merrill Lynch, Citigroup Inc., Goldman Sachs Group Inc., JPMorgan Cazenove and HSBC Holdings Plc, the Sunday Times reported yesterday.

Under the Asset-Protection Scheme, the government in March agreed to insure Lloyds’ riskiest assets in return for a 15.6 billion-pound fee. Lloyds is seeking to reduce the government’s holding because the EW may force it to sell assets or branches to comply with state aid rules.

That would potentially unravel Chief Executive Officer Eric Daniels’ acquisition of HBOS Plc, completed in January.

To contact the reporter on this story: Gonzalo Vina in London at gvina@bloomberg.net

Last Updated: October 26, 2009 12:46 EDT