Paragon targets complete RMBS capital structure sale
* First sale of class C notes since 2007 crisis
* Landmark for non-banks as risker tranches recover poise
By Owen Sanderson and Anil Mayre
LONDON, Oct 11 (IFR) - UK buy-to-let specialist Paragon will try to sell down the entire capital structure in its new Paragon (17) securitisation, placing not just the super-safe Triple A rated bonds, which many issuers have done since the crisis, but also two riskier tranches subordinated to that.
Paragon itself will be left with only the regulatory minimum from the residential mortgage-backed securitisation (RMBS) - 5% risk retention, as required by the European Union's "skin in the game" rule.
Most RMBS securitisations are issued by banks, whose capacious balance sheets can accommodate the subordinated tranches which provide credit support to the Triple As. Paragon, however, is not a bank and as such its small balance sheet cannot afford to finance retentions out of its own funds. Therefore even with investors demanding high spreads, it will want to sell as much as possible of a given securitisation.
Despite its constrained balance sheet, Paragon still opted to issue only Triple A notes in its last deal in November 2011, Paragon (16), holding the GBP32.1m unrated class Z on balance sheet - almost a 20% retention.
However, Paragon (17) will be issued into a transformed market for UK RMBS. When the previous deal was issued, Granite Triple B notes, treated as a risk proxy by the RMBS trading community, were trading around 50p on the pound, while last week they were quoted around 79p on the pound.
A further illustration of the favourable backdrop is the performance of ALBA 2012-1, a securitisation of mortgages to borrowers which do not meet "prime" criteria. ALBA priced at 95.784, giving a discount margin of 350bp, in March this year. However, when auctioned this week, the second best bid on the bonds was 102.15 for GBP24.3m size - a margin of 150bp, according to one trader.
Buy-to-let mortgages, which form Paragon's collateral, are typically considered to have better credit quality than non-conforming mortgages, since even if a landlord defaults, the tenants of the properties will still be producing enough income to cover mortgage costs.
However, figuring out where Paragon (17) itself should price is harder. One ABS syndicate manager suggested 200bp-225bp for the seniors, but there is no market for class B and C UK buy-to-let. The only bonds which trade are pre-crisis vintage, and have extremely long average lives.
Paragon will offer GBP175m of Triple A (S&P/Fitch) rated Class A notes, GBP10.5m of Double A rated Class B notes and GBP10m of Single rated Class C notes. Paragon will retain a GBP4.5m Class D piece, and a GBP6m First Loss Fund.
Lead managers are Lloyds, Macquarie and Morgan Stanley, the panel of banks from last year's deal.
WHEN DOES IT PAY?
Paragon is marketing the deal with three different average life scenarios - securitisations pay off when the underlying assets are repaid, so predicting the cashflows of the bonds depends on assumptions about how quickly borrowers refinance.
If Paragon calls the bonds on the first call date, they will have weighted average life of 2.9-years in the Class A notes and 3.2-years in both Class B and C.
In the second scenario, the bonds see 5% constant prepayment rate (CPR) - or the rate at which borrowers prepay their mortgages - for the first four years, followed by 15% after that, assuming the issuer does not call.
If Paragon does not call, all free cashflows from the portfolio go to pay the bonds - they will switch to "turbo" amortisation. In this case, Class A has a 5.5-year average life, with 10.4-years for Class B and 10.7-years for Class C.
The third scenario is 5% CPR with no call from Paragon, but no acceleration of prepayments. This gives 6.8-years on the Class A, 13.7-years on the Class B, and 14-years on the Class C.
Paragon's mortgage pool for the deal is GBP190m - but this is split between completed loans and post-offer pre-completion loans, which account for some GBP49.83m of the total. The characteristics of each pool are similar, with the combined pool featuring no arrears, a 69.14% loan-to-value ratio, 0.3-years seasoning, and GBP166k average loan size.
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