Private equity group Bain Capital is buying a portfolio of mostly UK leveraged loans at a knockdown price from state-backed British bank Lloyds as it accelerates the shrinking of its bloated loan book.

Bain Capital's credit investment arm Sankaty Advisors has agreed to buy a portfolio with a face value of about 500 million pounds ($792 million), according to two people familiar with the situation, one of whom said the loans were sold at a significant discount to face value.

Lloyds has been selling off non-core assets as part of a restructuring to strengthen its financial positions, chipping away at its 141 billion pound book of non-core loans, which includes property loans, general corporate loans and specialist finance loans. Most of the portfolio comprises old loans from HBOS, the troubled bank Lloyds bought at the height of the financial crisis four years ago.

The deal shows how private equity firms are looking for new sources of income and beefing up their debt investment activities as banks - which are refusing to lend for new buyouts - are selling off swathes of existing loans.

Under new CEO Antonio Horta-Osorio, Lloyds sold 53 billion pounds of loans last year through a combination of portfolio deals and single loan sales. It is looking for buyers for a $10 billion portfolio of shipping loans and trying to sell other loan portfolios, sources have said.

The non-core portfolio consists of loans that do not deliver targeted returns, are high risk, may be distressed or sub-scale, or may not fit with Horta-Osorio's strategy.

Under the deal with Sankaty, Lloyds will sell about 26 leveraged loans made to private equity-backed firms, the majority of which are performing well, one of the sources said.

Many big private equity firms branched out into debt investment, initially as a way of financing their own deals, but more recently to hoover up a broad range of assets from high-yield bonds to leveraged loans being sold by banks to prepare for stringent regulation.

Banks, including Lloyds, have been hit with tougher rules that mean they have to hold more capital against loans, making them more costly to hold and forcing dozens of lenders to sell assets as they struggle to deliver returns above the cost of capital.

Some private equity groups such as Apollo Global Management and Oaktree Capital often buy debt in the hope of seizing control of underperforming companies, while other buyers, like Sankaty, prefer to buy and hold until pricing recovers or the loans mature.

With a limited number of loans in the portfolio, Sankaty's London-based team was able to assess each company individually, and while most are performing well, some may not recover their full value, one of the people said.

Sankaty Advisors accounts for about a quarter of Bain's $60 billion of assets under management.

Lloyds and Bain declined to comment.

($1=0.6310 British pounds)

(Addiitonal reporting by Steve Slater; and Stephen Mangan; Editing by Mike Nesbit; Editing by Will Waterman)