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April 28 (Bloomberg) -- Lloyds Banking Group Plc will issue a total $3.69 billion of bonds backed by residential mortgages denominated in euros, dollars and pounds.

The transaction includes the equivalent of $500 million of one-year top-rated class 1A notes, $759 million of class 2A securities and $911 million of 3A bonds, said Sara Evans, a London-based spokeswoman for the U.K.’s largest mortgage lender. The notes are being issued through Lloyds’s Arkle 2010-1 master trust, a vehicle set up to package mortgages into securities.

The Arkle securities are the first from Lloyds in two years that don’t offer investors the right to demand repayment at the expected maturity date amid signs demand for asset-backed debt is increasing. Sales of the notes in Europe rose to 17.3 billion euros ($22.8 billion) this year, almost double the 8.8 billion euros sold in all of 2009, JPMorgan Chase & Co. data show.

“Arkle collateral is better than the average for a U.K. RMBS master trust,” said David Watts, a London-based strategist at CreditSights Inc. “We think Arkle presents relatively low risk to investors.”

The extra yield, or spread, that investors demand to buy five-year U.K. mortgage-backed securities is 115 basis points over benchmark rates, close to the lowest since July 2008, JPMorgan prices show. Mortgage-backed bonds sold last year through Nationwide Building Society’s Silverstone master trust trade at a spread of about 120 basis points, according to Deutsche Bank AG data.

Step Up

All of the new Arkle securities apart from the one-year notes can be redeemed at the issuer’s discretion from February 2017, according to Lloyds. The coupon on the notes doubles if they aren’t redeemed at the first call date.

The legal maturity of all but 1A notes is 2060, compared with 2052 of most of the existing Arkle notes.

The new Arkle notes “probably should trade wide to existing notes of the same class,” said Watts, due to aspects including “the longer maturities, the later calls and step ups.”

The Arkle notes are backed by 31.3 billion pounds ($47.5 billion) of prime mortgages originated by Lloyds TSB and Cheltenham & Gloucester Plc units.

T* Class Expected Ratings Size Average Life

Moody’s/Fitch/S&P (Years) 1A P-1/F1+/A-1+ £/$($500m eq) 1.06 2A Aaa/AAA/AAA £/$(£500m) 2.82 3A Aaa/AAA/AAA £/EU(£600m) 4.82 4A Aaa/AAA/AAA £600m 4.82 5A Aaa/AAA/AAA £400m 6.82 T*

To contact the reporter on this story: Esteban Duarte in Madrid at

To contact the editor responsible for this story: Paul Armstrong at

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