Nov. 4 (Bloomberg) -- Royal Bank of Scotland Group Plc, Britain's fifth-largest bank, plans to sell government-guaranteed bonds as soon as this week, according to a person familiar with the transaction.

The Edinburgh-based bank plans to issue U.K.-backed debt maturing in two to three years, said the person, who declined to be identified because the deal isn't complete. Fiona McRae, a spokeswoman at RBS in Edinburgh, declined to comment.

RBS may be the third lender to use the U.K. government's pledge to guarantee as much as 250 billion pounds ($396 billion) of bank debt to help unlock credit markets. Barclays Plc, Britain's No. 2 bank by market value, and HBOS Plc sold the equivalent of 5.4 billion pounds of guaranteed debt last month.

``Funds typically buying government-controlled agencies and sovereign bonds should be interested in the deal,'' said Suki Mann, a strategist at Societe Generale SA in London. ``There's very good demand for these kind of assets.''

RBS said today it abandoned its full-year profit forecast after writing down 1.4 billion pounds of assets in the third quarter and before reclaiming 1.2 billion pounds under new accounting rules, according to a statement. The lender also said it wrote down 1 billion pounds in October against assets tied to Lehman Brothers Holdings Inc. and failed Icelandic banks.

Lloyds TSB, Abbey National Plc, HSBC Holdings Plc, Nationwide Building Society and Standard Chartered Plc can also sell government-guaranteed bonds with maturities of up to three years, according to the U.K. Debt Management Office. The guarantee was made available for six months and may be extended by the Treasury, according to the DMO in October.

Cost of Funds

Banks selling government-backed bonds are charged an annual 50 basis-point fee on the amount issued plus the median price of their five-year credit-default swaps, according to the DMO. That means RBS may pay the Treasury an annual 13.4 million pounds on every 1 billion pounds of debt it sells, according to Bloomberg calculations based on Markit Group Ltd. prices for default swaps.

Bond sales in currencies other than pounds may incur additional fees, the DMO said.

The U.K. government is bailing out its banks as the economy heads toward its first recession since 1991. Prime Minister Gordon Brown has called on banks to start lending again after a seizure in credit markets sent the housing market into freefall and kept money-market rates near record highs.

Barclays raised 3 billion euros ($3.8 billion) on Oct. 22 in the first issue of U.K. government-backed bonds under the bailout plan. The London-based bank's three-year notes were priced to yield 119.9 basis points over similar-maturity government debt, Bloomberg data show.

Bank of Scotland Plc, a unit of HBOS, sold 3 billion euros of government-guaranteed two-year bonds at a spread of 136.3 basis points more than government securities. The Edinburgh-based lender also raised 600 million pounds from three-year bonds at a spread of 122.6 basis points, according to Bloomberg data.

Credit-default swaps are financial instruments based on bonds and loans that are used to speculate on a company's ability to repay debt. They pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements.

To contact the reporters on this story: Shelley Smith in London at ssmith118@bloomberg.net; Esteban Duarte in Madrid at eduarterubia@bloomberg.net

Last Updated: November 4, 2008 09:17 EST