—Hugh Leask
Paragon Mortgage will issue a new securitization of U.K. buy-to-let residential mortgages during the third quarter, likely sized at around £200 million ($322 million), John Harvey, head of structured finance, confirmed to TS. Buzz surrounding the return of Paragon to the primary market has the transaction providing a major boost to the recovery of Europe’s securitization industry. The deal’s collateral consists of newly originated loans.
The transaction is notable since Paragon’s mortgage lending activity prior to the crisis was funded almost entirely through securitization. Paragon stopped new mortgage originations in February 2008 after the U.K. securitization market ground to a halt. Last October, the firm secured a £200 million warehouse facility from Macquarie Bank. “New originations began when we re-entered lending following the signing of the Macquarie warehouse,” Harvey told TS in an interview Thursday.
Macquarie is expected to be one of the firms running the deal, according to a London-based RMBS portfolio manager. “Clearly Macquarie will be on it, because they’ve done the warehouse and they’ll get fees from doing the lead management,” the investor explained. Harvey declined to name the engaged banks, but said firms have already been selected. Officials at Macquarie could not be reached.
Paragon’s return gives promise to the viability of European securitization as a funding option, given the lender was heavily reliant on RMBS in the past to fuel mortgage origination. “The fact they’ve got a warehouse line originating new mortgages means they believe they can get a securitization away,” said Phil Adams, director of securitization strategy at the Royal Bank of Scotland in London.
The U.K. RMBS investor also welcomed the new deal. “We’ve been a fan of Paragon all the way through the crisis—it’s a decent company, and its assets have performed exceedingly well,” he said.
Adams pointed to increased variety in new European securitizations. “That’s a good thing,” he told TS. “It’s a positive for Paragon, because they need to tap into that sense of adventure in the investor base to invest in something different, and they’ve demonstrated that buy-to-let isn’t as risky as some thought it would be.”
Harvey said Paragon began floating the idea of a new securitization with investors prior to landing the warehouse. “Research started in February last year. We met with around 50 investors in the U.K., France, Germany and the Netherlands to look at the economics of buy-to-let. Their appetite for new Paragon paper was confirmed,” he said. Paragon met again with roughly 40 investors at this week’s Global ABS conference in Brussels. “We have spoken to investors over the last 2-3 days, to update them with progress on originations.”
The deal will follow a “typical Paragon structure—simple, transparent [deal] with a straight pass through,” Harvey said, pointing it last deal before the market shuttered, Paragon Mortgages No. 15 (TS, 6/28/2007). JPMorgan was lead manager and arranger of the £1 billion ($1.6 billion) 2007 vehicle.
Harvey said strong feedback for the entire credit structure at Global ABS means the issuer will publicly offer the A, B and C tranches. “We are confident all those tranches will be sold—they were part of our conversations with investors throughout 2010 and 2011,” Harvey said. Paragon is still probing the possibility of issuing and retaining a class D note in order to comply with the E.U.’s Capital Requirements Directive’s Article 122a, which mandates 5% risk retention for issuers.