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I posted about their problematic expensive recent securitization:

http://www.housepricecrash.co.uk/forum/index.php?/topic/205642-btl-scum-regrouping-and-on-the-offensive-merged/page-165#entry1102830152

Results out today:

http://hsprod.investis.com/ir/pag/ir.jsp?page=news-item&item=2269102089437184

Worth a read through. Basel and regulatory changes mentioned.

Bit that cought my eye:

"During the first six months of the financial year, sterling credit markets were favourable, with swap spreads stable and gilt yields declining to historical lows as inflation expectations reduced. The improved funding backdrop led to an increase in note issuance which was increasingly backed by non-conforming assets and offered to investors at a higher margin than the Group's issuance. This increase in supply led to margins on new issues widening significantly as the year progressed.

PM24 priced in difficult market conditions, reflecting an expectation of increased issuance. In recent months several very large mortgage portfolio sales have taken place, with more expected to follow. We understand that bond investors expect these transactions to be refinanced through the securitisation market during 2016, resulting in substantial additional supply of issuance. This is turn has led to an assumption than wider margins will be needed to achieve that volume, substantially in excess of those at which PM24 was priced, and this expectation has led to higher present margins being demanded by investors on new issues. The Group has significant warehouse capacity and intends to expand the proportion of its buy to let advances funded by Paragon Bank, providing the Group options regarding the timing of its next securitisation transaction."

Is the securitization route becoming more expensive? Will this lead to higher BTL rates?

Edited by growlers

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I beleive securitization is a small part of total mortgage lending in UK (compared to the US for example), so I don't expect this to have much effect. I imagine that changes in capital rules at banks would have a bigger impact.

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I think you are right.

Apparently gross BTL lending is £7.6B per quarter so say £30B pa.

Paragon issued c. £1b last year in securitizations and apparently they have been c. 40% of the securitization market since 09.

Still every little helps.

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I posted about their problematic expensive recent securitization:

http://www.housepricecrash.co.uk/forum/index.php?/topic/205642-btl-scum-regrouping-and-on-the-offensive-merged/page-165#entry1102830152

Results out today:

http://hsprod.investis.com/ir/pag/ir.jsp?page=news-item&item=2269102089437184

Worth a read through. Basel and regulatory changes mentioned.

Bit that cought my eye:

"During the first six months of the financial year, sterling credit markets were favourable, with swap spreads stable and gilt yields declining to historical lows as inflation expectations reduced. The improved funding backdrop led to an increase in note issuance which was increasingly backed by non-conforming assets and offered to investors at a higher margin than the Group's issuance. This increase in supply led to margins on new issues widening significantly as the year progressed.

PM24 priced in difficult market conditions, reflecting an expectation of increased issuance. In recent months several very large mortgage portfolio sales have taken place, with more expected to follow. We understand that bond investors expect these transactions to be refinanced through the securitisation market during 2016, resulting in substantial additional supply of issuance. This is turn has led to an assumption than wider margins will be needed to achieve that volume, substantially in excess of those at which PM24 was priced, and this expectation has led to higher present margins being demanded by investors on new issues. The Group has significant warehouse capacity and intends to expand the proportion of its buy to let advances funded by Paragon Bank, providing the Group options regarding the timing of its next securitisation transaction."

Is the securitization route becoming more expensive? Will this lead to higher BTL rates?

I note that Paragon reported today and I decided to start looking into their financial statements.

AIUI, Paragon seems to be a relatively simple company:

  • It writes loans (principally BTL).
  • Moves these to subsidiary Special Purpose Vehicle (SPV).
  • Writes Asset Backed Securities (ABS) secured on loans in the SPV.
  • ABS are sold on to other entities.
  • Paragon administers the collection of monies from lenders, chases late payments etc and reports on securitisation performance (http://www.paragon-group.co.uk/investors/bond-investor-reporting).
  • Derivatives are entered into to hedge the currency and interest rate mismatches (some ABS are in foreign currencies).
  • Other funds are secured from retail deposits, bond and overdraft where required.

I'm not sure the above is 100% accurate but is my current working understanding of the high level workings of the company.

I recalled my post from last year (see above) regarding a problematic ABS issuance PM24 (the last one issued). Margins payable by Paragon to investors to offload ABS to investors were materially higher than previous offerings. I speculated at the time that securitisation was about to become more expensive.

I wanted to understand the movement in Paragons Balance Sheet over time so pulled the following together:

https://file.io/COzwuQ

What was striking to me was the extent to which Paragon is having to rely on retail deposits now to fund its lending and that this only really took off in 2015 and 2016. Seems that Paragon is becoming more like a traditional bank (but without the user base presumably). I suppose this is to be expected given credit issues and pickup of yield in high yield debt noted in the financial press.

I plan to look into the rates offered by Paragon on its BTL and savings account. Presumably retail deposit funded loans will be more expensive for Paragon than the ABS route since they lack the scale of the traditional banks. I speculate that this will lead them to:

1) Reduce lending and/or

2) Focus on higher yielding offerings e.g. Ltd Co BTL.

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I note that Paragon reported today and I decided to start looking into their financial statements.

AIUI, Paragon seems to be a relatively simple company:

  • It writes loans (principally BTL).
  • Moves these to subsidiary Special Purpose Vehicle (SPV).
  • Writes Asset Backed Securities (ABS) secured on loans in the SPV.
  • ABS are sold on to other entities.
  • Paragon administers the collection of monies from lenders, chases late payments etc and reports on securitisation performance (http://www.paragon-group.co.uk/investors/bond-investor-reporting).
  • Derivatives are entered into to hedge the currency and interest rate mismatches (some ABS are in foreign currencies).
  • Other funds are secured from retail deposits, bond and overdraft where required.
I'm not sure the above is 100% accurate but is my current working understanding of the high level workings of the company.

I recalled my post from last year (see above) regarding a problematic ABS issuance PM24 (the last one issued). Margins payable by Paragon to investors to offload ABS to investors were materially higher than previous offerings. I speculated at the time that securitisation was about to become more expensive.

I wanted to understand the movement in Paragons Balance Sheet over time so pulled the following together:

https://file.io/COzwuQ

What was striking to me was the extent to which Paragon is having to rely on retail deposits now to fund its lending and that this only really took off in 2015 and 2016. Seems that Paragon is becoming more like a traditional bank (but without the user base presumably). I suppose this is to be expected given credit issues and pickup of yield in high yield debt noted in the financial press.

I plan to look into the rates offered by Paragon on its BTL and savings account. Presumably retail deposit funded loans will be more expensive for Paragon than the ABS route since they lack the scale of the traditional banks. I speculate that this will lead them to:

1) Reduce lending and/or

2) Focus on higher yielding offerings e.g. Ltd Co BTL.

Great stuff as always.

Thanks for posting and keep it coming.

Paragon have the biggest exposure to BTL on their mortgage loan book of any UK financial institution.

They have also been the biggest securitizers of mortgages in the UK recently.

They claim to apply tighter equity, rental yield and other lending criteria on borrowing than other BTL funding suppliers though the proof of that boast has not really been tested in adverse market conditions.

They are big players in the London and SE BTL market so any changes in their financial circumstances is likely both to reflect and have a big impact on that particular area of the UK.

The fact they appear to be having issues off loading their loan book into the ABS market without offering a suitable risk premium on yield suggests that other institutions and buyers of such securities have started to get cold feet about the sustainability of the UK BTL housing market even in a rock bottom interest rate environment.

Worth noting that Paragon shares slid today despite the company posting a 12.5% increase in underlying profits. They were the biggest faller in the FTSE 250.

https://uk.finance.yahoo.com/q?s=PAG.L&ql=1

The pipeline of new business is also down which means fewer BTL completions are likely in the near future.

http://www.cityam.com/241880/surge-in-buy-to-let-loans-dries-up-pipeline-for-lender-paragon

It might be worth keeping an eye on that share price. There are signs some hedge funds are now starting to place bets against some of the world's more inflated housing markets.

Edited by stormymonday_2011

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I pulled together the data from various past securitisations (since 2007) per the Bond Investor section (http://www6.paragon-group.co.uk/pgroup.nsf/securitisationMainFS) and graphed the Margins achieved by Paragon (BP + 3 month Libor / Euribor):

http://gofile.io/?id=MK7tZT

It's interesting to see that for B notes issued by Paragon, margins bottomed at 100 bp in March 2014 (PM20) and then increased 150% to 250 bp in Nov 2015. That seems like a large increase in a short period of time to me.

This increase is mirrored per the chart on page 20 in the AFME report:
http://www.afme.eu/WorkArea/DownloadAsset.aspx?id=13981

Note - This chart shows spreads vs. corporate bonds rather than 3 month Libor.

It's worth noting that spreads on "Prime" Residential Mortgaged Backed Securities (RMBS) are flat where as "Non-conforming" RMBS have jumped up. I assume that BTL securitisation must fall within the "UK RMBS (Nonconforming)" category although this category isn't defined within the report. Most likely this category includes a bunch of other mortgaged (self cert etc) including BTL.

The fact that that movement for "Non-confirming" isn't as large as the increase per the Paragon charts suggest that part of the increase in rates experienced by Paragon is general and not specific to Residential Mortgaged Backed Securities (RMBS) (i.e. Spreads are vs Corporate Bonds).

Screenshot from 2016-05-25 21:21:11.png

Screenshot from 2016-05-25 22:20:43.png

post-41082-0-34525400-1464207847_thumb.png

post-41082-0-36723100-1464211265_thumb.png

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What was striking to me was the extent to which Paragon is having to rely on retail deposits now to fund its lending and that this only really took off in 2015 and 2016. Seems that Paragon is becoming more like a traditional bank (but without the user base presumably). I suppose this is to be expected given credit issues and pickup of yield in high yield debt noted in the financial press.

I plan to look into the rates offered by Paragon on its BTL and savings account. Presumably retail deposit funded loans will be more expensive for Paragon than the ABS route since they lack the scale of the traditional banks. I speculate that this will lead them to:

1) Reduce lending and/or

2) Focus on higher yielding offerings e.g. Ltd Co BTL.

http://www.paragon-group.co.uk/investors/retail-bond/Retail-Bond-2015

This is obviously what has drive the growth in retail deposits.

6% seems quite a high rate to pay! They carry an early redemption option for Paragon (their ABS notes do to) but still.

http://www.londonstockexchange.com/exchange/prices-and-markets/retail-bonds/company-summary/XS0891023086ZZGBPUKCP.html

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https://www.investegate.co.uk/paragon-grp-co-plc--pag-/rns/trading-update/201707260700020624M/

Nigel Terrington, Paragon's Chief Executive said:

"I am pleased with the Group's performance for the year to date.  Our strong capital and funding resources provide the foundations for further growth alongside returning additional sums to shareholders via the enhanced buy-back programme.  Our new business streams continue to develop well and the increasingly complex focus in buy-to-let demand is also supporting absolute growth and market share gains for Paragon.  The Group is well-placed for the next phase of PRA underwriting rule changes, which will provide Paragon with a further competitive advantage".

:mellow:

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12 minutes ago, LittlePig said:

https://www.investegate.co.uk/paragon-grp-co-plc--pag-/rns/trading-update/201707260700020624M/

Nigel Terrington, Paragon's Chief Executive said:

"I am pleased with the Group's performance for the year to date.  Our strong capital and funding resources provide the foundations for further growth alongside returning additional sums to shareholders via the enhanced buy-back programme.  Our new business streams continue to develop well and the increasingly complex focus in buy-to-let demand is also supporting absolute growth and market share gains for Paragon.  The Group is well-placed for the next phase of PRA underwriting rule changes, which will provide Paragon with a further competitive advantage".

:mellow:

Its a shunt and sell financial company, based on junk mortgage products.

Once junk mortgage products are no longer sold, paragon has no business.

 

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Buy-to-let

Paragon's application flows remain strong reflecting market share gains in an otherwise subdued UK buy-to-let market.  The Group's growth reflects increasing demand from more complex and professional customers.  The proportion of these customers in the pipeline has risen to 70.0% during the quarter, up from 61.8% at the start of the year.  The pipeline (58.5% of which is for remortgage) continues to be healthy at £699.8 million at the end of the quarter. Paragon launched its updated complex lending proposition on 17 July 2017, well in advance of the PRA's 1 October 2017 deadline. 

96% of lending in the quarter took place through Paragon Bank, reflecting its increasingly important role in financing the Group's new lending flows.

Redemption levels rose on the new BTL portfolio as it continues to mature, taking the annualised redemption rate for 2017 to 20.6% for the new book and 10.9% for the total portfolio.

:lol:

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