The UK’s Royal Bank of Scotland Group, the biggest arranger of leveraged buyout loans last year, is mulling plans to create what is being called a “Loan Value Fund,” to contain the risk of losses of $2.3 billion of junk bonds it holds. But how can such a fund make its investors any money? Ah, but that is the magic of finance.

Royal Bank of Scotland Group Plc, the U.K.'s second-biggest lender, plans to start a fund to transfer the risk of losses from 1.5 billion euros ($2.3 billion) of high-yield loans, according to three people with knowledge of the proposal.

The fund will earn a return for investors by selling contracts to RBS that protect the bank from losses on 15 loans in euros and pounds and a further six in dollars, said the people who declined to be identified because the discussions are private.

Banks have cut the $245 billion of leveraged buyout loans they got stuck with as investors fled the market last year to $95 billion by selling the debt at a loss, according to data compiled by Standard & Poor's. RBS said today it may sell shares to help shore up capital after reports that it will announce further writedowns this week.

Banks ``have a revenue problem if they don't clean up their balance sheets to make new loans,'' said Jeffrey Kushner, a managing director at Blue Mountain Capital Management LP in New York, which manages $4.5 billion of assets. ``It's in everybody's interests from the LBO firms to the banks to institutional investors to move on.''

RBS will hold a stake in the Loan Value Fund run by RBS Asset Management and will share in gains or losses alongside investors, according to the people familiar. Linda Harper, a spokeswoman for RBS in Edinburgh, declined to comment.

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