High-yield bond issuance by UK mortgage loans company scheduled, January 30

30 Jan

The Paragon Group of Companies plc, which provides buy-to-let mortgage loans to landlords and property investors, has revealed it will release £1billion in senior unsecured debt over 2014. Several different note tranches will be made available under its year-long Euro Medium Term Note Programme.

With a fixed 6.125% coupon rate, payable semi-annually, the notes will only be permitted to trade on the regulated market of the London Stock Exchange; and on the Electronic Order Book for Retail Bonds (ORB). Canaccord Genuity Ltd will be appointed a registered market maker over the ORB when the notes are issued.

The first date of unconditional trading is 30 Jan. 2014. Books opened to the primary market, in advance of margin trading on the secondary market, for a £2000 minimum subscription. But advance bidding has now closed.

The Paragon Group of Companies, until 1997 known as National Home Loans Holdings, justified its expansionist borrowing scheme by describing the upward trend in its area of operation, stating that although “The Council of Mortgage Lenders (CML) reported that activity in the UK’s housing market,” (number of house sales) “has decreased significantly from £362 billion of transactions in 2007 to £141 billion in 2011… rental demand has grown significantly… CML reported that the value of buy-to-let (BTL) advances increased by 23.6 percent to £15.7 billion during 2012 versus £12.7 billion in2011 (September to September).”

The note issuer continued with a market forecast: “As a consequence of the high level of demand, recent Royal Institution of Chartered Surveyors (RICS) UK Residential Lettings Survey surveys indicated that rental yields are expected to increase. Data from the Association of Residential Letting Agents (September 2012) supports this trend, with the majority of agents reporting an increase in achievable rents over the six months to June 2012.”

However in view of the high 6.125% coupon, it is necessary to bear in mind the company’s risk disclaimer, which  warns first that “Adverse changes in the credit quality of the Group’s borrowers could result from a general deterioration in UK economic conditions or increases in the interest rates and borrowing costs.” And furthermore, that because the majority of the group’s loans charge a floating interest rate, “Increased borrower default risk can result from an increase in interest rates after an initial concessionary period.”Both the inherent credit risk in the group’s lending activities, and the uncertainty around continued real estate market growth, are potential deterrents to investors.

Selected financial information in the prospectus summary shows the Paragon Group of Companies’ assets exactly match its liabilities. And vitally, that its total operating income increased from £150.9 million to £170.2 million between 30 Sept 2011 and 2012; its profit showed a similar trend, growing from £59.6 million to £72.2million from 2011 to 2012. It remunerated its shareholders accordingly, with a dividend that was raised from 4.00p to 6.00p over the same period.

Renumeration on the notes will be denominated in sterling, and the issuer accepts no responsibility for exchange rate fluctuations which might affect the security’s value for subscribers whose domestic currency might have increased or decreased in relation to GBP.




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