Paragon has arranged funding via a new warehouse debt facility and will resume buy-to-let lending with immediate effect. These will be the first new buy-to-let mortgages that Paragon has offered since February 2008 when it withdrew from the market due to conditions in the global financial markets.
Macquarie Bank is providing the £200 million warehouse facility. The Group’s intention will be to use the facility to warehouse loans prior to arranging term funding in the mortgage-backed securitisation markets, where the Group has considerable experience stretching back over 20 years. There has been increasing evidence of a recovery in the asset-backed market with numerous securitisations being launched by a number of major UK and European banks.
Paragon has held bond investor roadshows during 2010 and there is strong investor demand for Paragon residential mortgage-backed securities given the excellent performance of its historical mortgage assets.
The number of accounts more than three months in arrears across Paragon’s portfolio of buy-to-let loan assets has continued to fall and is currently 0.86% of the book. This is significantly below buy-to-let market peers and also the wider mortgage market.
Lending strategy
It is Paragon’s aim to return to its market-leading position in the buy-to-let sector, specifically targeting professional landlords. This is an area of the market currently underserved by buy-to-let lenders and one in which Paragon is wellpositioned given its expertise and experience in buy-to-let lending. Paragon will offer a range of buy-to-let products through the Paragon Mortgages brand.
Paragon will continue to maintain a prudent and risk-averse approach to new lending, placing greater value on long-term customer relationships, credit quality and profitable products rather than simply market share. This strategy has proved successful for Paragon and is a driving factor in the excellent credit performance of the Group’s assets.
During the eleven months to 31 August 2010, only £231.1 million of Paragon’s buy-to-let loan book has redeemed and the size of the warehouse facility, and its revolving nature, will provide the basis to support the expansion of the lending business.
Buy-to-let market
Competition in the buy-to-let mortgage market has reduced dramatically since the start of the credit crunch and the new lending sector has been dominated by just two lenders, accounting for up to 80% of new business written.
The number of available buy-to-let products has fallen from over 3,600 in July 2007 to under 280 in September 2010. Many of these products are focused towards the novice or small scale landlord, failing to cater for professional landlords’ more complex financial needs.
Strategy
The acquisition of loan portfolios and loan servicing of third party clients will remain a core part of the strategy going forward.
Trading
In addition to announcing its return to new lending, Paragon also today gave a trading update for the eleven months to 31 August 2010. The Board expects operating profits (before exceptional and fair value items) for the year to 30 September 2010 to be above the current market consensus forecast (£58.2 million) and around the upper end of analysts’ current expectations, which range from £40.5 million to £65.0 million. In addition, as previously disclosed, pre-tax profits will include an exceptional profit of £5.7 million on the purchase of Group securitised bonds.
Nigel Terrington, Paragon Group’s Chief Executive says:
“Despite the difficult environment over the past three years, Paragon has remained steadfast in its commitment to return the business to new lending when conditions permitted.
“We are delighted to have secured funding on acceptable and sustainable terms to enable us to return to new lending and to work with Macquarie on this significant transaction. They are an ambitious and innovative institution and this transaction demonstrates clear evidence of their intentions to develop a leading role in the UK debt and equity markets.
“This is not only a significant development for Paragon; it is also significant for the wholesale funding and specialist lending markets. Paragon is the first independent non-deposit taking mortgage lender to secure funding to enable it to return to new lending. This shows that investor confidence is returning and the wholesale funding markets are recovering.
“Competition in the mortgage market has been sorely lacking, particularly as specialist lenders have largely been unable to secure funding or Government support to enable them to compete against high street lenders. Nowhere is this more evident than in the private rented sector where tenant demand is strong and expected to grow.
"This is an increasingly important part of the UK housing market and competition is vital for a healthy and vibrant buy-to-let market and we aim to provide that competition.”
