13th Feb

Paragon Tempts the Market at 6%

Hot on the heels of the success of the £145m issue by North Sea oil company EnQuest, Paragon, Britain's largest specialist buy-to-let mortgage lender is the latest company to offer a bond directly to investors by launching a retail bond, paying a relatively generous 6% until December 2020.

The senior unsecured bond will pay interest twice a year on March 5th and September 5th; it has a minimum deposit of £2,000 and investors can deposit £100 increments thereafter.

With a tartget of between £50 - £75m, the offer is due to close on February 26th but may sell out earlier in the event of high demand.

In 2012, a slew of high profile retail bond launches raised a total in excess of £1.5bn as companies struggled to attract, or sought to diversify, their sources of funding and investors struggled to achieve a return on deposits in excess of inflation.

Several of the fifteen retail bonds offered last year were forced to close early as maximum capacity was reached before the closing date due to investor interest.

As with any investment, those considering parting with their hard-earned should closely scrutinise the financial health of any company they are interested in.

Paragon is a FTSE 250 listed company worth around £900m, but was hit hard by the credit crisis as buy-to-let lending disappeared from the mortgage market. In addition to securitising its own lending, the company also manages portfolios for third parties.

Improved Fortunes

In 2008, it suffered a 41% drop in pre-tax profits, but by November 2010 the company's fortunes had improved and profits saw a 32% annual rise as banks reduced their lending to preserve capital.

Paragon's management stress that this offer does not represent short term refinancing, although the company does have a £110m corporate bond that is due to mature in 2017. In addition to financing its own lending, Paragon wishes to build a cash reserve so that it is able to respond quickly if, as the company believes, a number of banks seek to divest themselves of their loan portfolios in the future.

Paragon appears financially secure, its ten times gearing being roughly half that of an equivalent building society; its shares, which have risen from a low of 40p four years ago to a high today of 302p, currently yield 2.3% p.a.

In December, Paragon confirmed that it was in the “early stages” of talks to acquire Hampshire Trust Plc from National Counties Building Society in a move that would allow the lender to begin offering deposit and savings accounts.

Retail Bond Expert is  the vanguard in seeking a transparent and objective method of comparing bonds of differing structure, coupon and term to maturity.

In the interim, investors are advised to see past the attractive headline annual rates of return that are on offer and consider the structure of the bond on offer, the performance and prospects of the issuer, and the protections and debt structure that are described in the prospectus.

Although not currently indemnified by the FSA’s FSCS scheme, investors who bought at launch should have their initial deposit refunded in full on maturity.

Please feel free to contribute and comment if you have any thoughts regarding this or any other launch, or indeed any issue surrounding this market.

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