During the year the Group has continued to pursue its funding strategy of broadening its asset specific financing channels and enhancing its central debt capacity while making increased use of retail savings funding to take advantage of the defensive attributes of this form of funding.
The Group’s funding at 30 September 2015 is summarised as follows:
2015 2014 2013
£m £m £m
Paragon Mortgages 9,597.1 9,367.8 9,204.4
Idem Capital 102.9 145.1
-Paragon Bank 708.7 60.1
-Business specific funding 10,408.7 9,573.0 9,204.2
Corporate borrowings 404.9 293.2 169.1
10,813.6 9,866.2 9,373.5
Funding markets have been dominated by three key themes during the financial year; the launch of the ECB’s quantitative easing programme, the renegotiation of Greece’s funding arrangements with the ECB and IMF and concerns surrounding US interest rates. These themes were most pronounced in the latter six months of the financial year.
Paragon Mortgages funding
Buy-to-let mortgage originations outside of Paragon Bank are initially funded through four revolving warehouse facilities totalling £950.0 million at 30 September 2015 (2014: £550.0 million). Existing facilities with Lloyds Bank and Macquarie Bank were increased by £200.0 million in total during the year and a further facility of £200.0 million was agreed with Bank of America Merrill Lynch. This enhanced capacity within the Group, together with the option of using Paragon Bank funding supports the Group’s growth plans in the buy-to-let market.
In the longer term buy-to-let mortgage loans are funded through the securitisation markets. Three new public securitisation deals totalling £828.7 million, with senior notes rated AAA were completed in the year. In order to diversify its funding beyond the sterling market, the Group included euro denominated tranches on its Paragon Mortgages (No. 22) PLC and Paragon Mortgages (No. 23) PLC transactions, and these tranches were successfully placed with euro investors.
The Group’s 62nd transaction, Paragon Mortgages (No. 24) PLC (‘PM24’), for £350.1 million, completed post year-end.
STRATEGIC REPORT
The Group’s public securitisations in the current year, the previous year and post year-end are summarised below.
Securitisation Amount raised
£m Date Average funding
margin (basis points)
Paragon Mortgages (No. 24) PLC 350.1 November 2015 175
Paragon Mortgages (No. 23) PLC 292.5 July 2015 123
Paragon Mortgages (No. 22) PLC 292.5 March 2015 95
Paragon Mortgages (No. 21) PLC 243.7 November 2014 88
Paragon Mortgages (No. 20) PLC 343.0 July 2014 70
Paragon Mortgages (No. 19) PLC 343.0 March 2014 90
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 in turn has led to an assumption that 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 with options regarding the timing of its next securitisation transaction.
Alternative markets for Paragon Mortgages funding to the traditional sterling investor base will continue to be rigorously assessed in the interim, including the potential for US dollar issuance.
Idem Capital funding
Following the year end, in October 2015, an Idem Capital special purpose vehicle company (‘SPV’) entered into an agreement to issue £117.3 million of sterling floating rate notes to Citibank NA. These notes bear interest at a rate of one month LIBOR plus 3.5% and the funds raised were used to re-finance existing Idem Capital unsecured loan assets, previously funded intra-group and through an existing SPV, and are secured on those assets. The transaction raised net new funding of £65.5 million and, following the transaction, 37.9% of Idem Capital’s loan investment balances by value at 30 September 2015 were externally funded.
The new borrowings bear interest at a lower rate than the funding they replace and the increase in structured borrowings, on a limited recourse basis, represents a development in funding for Idem Capital, broadening its sources of finance and demonstrating its ability to access third party funding on a more regular basis, offering greater flexibility to the business.
Paragon Bank funding
The Bank currently targets the UK savings market and deposits are accepted over the internet and processed by a highly automated system with significant scope for future expansion.
Initially deposits accepted by the Bank were used to finance its car finance lending operations, expanding into secured lending and increasingly into buy-to-let during the year. By 30 September 2015 Paragon Bank held deposits of
£708.7 million (2014: £60.1 million).
STRATEGIC REPORT
Savings balances at the year end are analysed below.
Average
interest rate Average
initial balance Proportion of deposits
2015 2014 2015 2014 2015 2014
% % £000 £000 % %
Fixed rate deposits 2.33% 1.90% 34 33 71.7% 66.2%
Variable rate deposits 1.62% 1.85% 16 25 28.3% 33.8%
All balances 2.13% 1.88% 28 31 100.0% 100.0%
The average initial term of fixed rate deposits was 29 months (2014: 14 months).
Following the year end savings deposits were used to finance a large part of the cash requirement for the Five Arrows Leasing Group acquisition, with balances having exceeded £950 million by the date of this report. With the Bank expected to contribute increasingly to the Group’s originations, the scale of its deposit-taking activities is expected to expand materially over the next few years.
Corporate funding
While the Group’s working capital has been primarily provided by equity since 2008, in recent years it has expanded its use of corporate debt funding, allowing it to diversify its funding base and extend the tenor of its borrowings.
The Group is now rated by Fitch Ratings, which has ascribed it an initial BBB- rating. With a strategy to increase holding company leverage levels over time, the rating will support long dated corporate debt issuance in both scale and pricing terms. The achievement of this investment grade rating represents a further significant development in the Group’s growth and diversification strategy.
The concerns in the funding markets from mid-year onwards also impacted the retail bond market, with demand more subdued than in previous years. Nonetheless, in August 2015, the Group issued £112.5 million of 6.0% sterling bonds due August 2024. The bonds, listed on the London Stock Exchange Order Book for Retail Bonds (‘ORB’), were issued to provide additional working capital for the Group. This was the third transaction under a £1.0 billion Euro Medium Term Note Programme announced in January 2013 and renewed to allow further issuance in October 2014. This brought the total issued under the programme to £297.5 million.
Further information on all of the above borrowings is given in note 50.
The additional sources of finance for the Group, together with the Fitch rating, extend and diversify its funding sources, better placing it to support future growth. In the medium term, the Group is targeting a balance between securitised and retail deposit funding for its new lending activities.
STRATEGIC REPORT