Paragon took advantage of the most favourable conditions seen in the RMBS markets since the onset of the credit crisis, to price this latest transaction.
The deal which was £200mm in size, encompassed £175mm of AAA bonds priced at Libor +135bp, £10.5mm of AA bonds priced at Libor +190bp, and £10mm of A rated bonds at Libor +290bp. The remaining junior notes were retained by Paragon.
The mortgages had a loan to value of approximately 69%, but senior bondholders also benefitted from the additional cushion of junior notes and a healthy 2% expected excess spread.
Credit-wise this was an excellent transaction, but importantly it attracted significant interest from the buyer universe who have become increasingly comfortable with buy-to-let mortgages as they have exhibited the same sort of resilience to losses as the prime market in the UK.
None of the previous 16 Paragon deals even cut through excess spread at any point, including during the credit crisis, which is only the first level of defence for example.
As Paragon is not a bank they have not had the huge benefit of unlimited and cheap financing from the central bank, hence their ability to grow their business has been heavily hampered by a lack of viable financing.
Therefore the deal will have struck a particular note with their shareholders too as the stock has traded at a discount to asset value throughout the crisis, having been very much a growth story in the run up to 2007.
If financing continues to be available at these levels it will certainly increase the flow of lending to the starved buy-to-let market, which in turn may finally cause the refinancing rate for mortgages, and therefore the prepayment rate for bonds in this sector, to pick up from the lowest levels since records began. Eventually it will also return the stock to a growth story.
But as far as the RMBS market is concerned this is just another step towards full rehabilitation and the rally goes on as bonds continue their grind in towards a more realistic valuation.
Mark Holman is managing partner at TwentyFourAM.com
