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 willtry to sell down the entire capital structure in its new Paragon(17) securitisation, placing not just the super-safe Triple Arated bonds, which many issuers have done since the crisis, butalso two riskier tranches subordinated to that.

Paragon itself will be left with only the regulatory minimumfrom the residential mortgage-backed securitisation (RMBS) - 5%risk retention, as required by the European Union's "skin in thegame" rule.

Most RMBS securitisations are issued by banks, whosecapacious balance sheets can accommodate the subordinatedtranches which provide credit support to the Triple As. Paragon,however, is not a bank and as such its small balance sheetcannot afford to finance retentions out of its own funds.Therefore even with investors demanding high spreads, it willwant to sell as much as possible of a given securitisation.

Despite its constrained balance sheet, Paragon still optedto issue only Triple A notes in its last deal in November 2011,Paragon (16), holding the GBP32.1m unrated class Z on balancesheet - almost a 20% retention.

BETTER BACKDROP

However, Paragon (17) will be issued into a transformedmarket for UK RMBS. When the previous deal was issued, GraniteTriple B notes, treated as a risk proxy by the RMBS tradingcommunity, were trading around 50p on the pound, while last weekthey were quoted around 79p on the pound.

A further illustration of the favourable backdrop is theperformance of ALBA 2012-1, a securitisation of mortgages toborrowers which do not meet "prime" criteria. ALBA priced at95.784, giving a discount margin of 350bp, in March this year.However, when auctioned this week, the second best bid on thebonds was 102.15 for GBP24.3m size - a margin of 150bp,according to one trader.

Buy-to-let mortgages, which form Paragon's collateral, aretypically considered to have better credit quality thannon-conforming mortgages, since even if a landlord defaults, thetenants of the properties will still be producing enough incometo cover mortgage costs.

However, figuring out where Paragon (17) itself should priceis harder. One ABS syndicate manager suggested 200bp-225bp forthe seniors, but there is no market for class B and C UKbuy-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) ratedClass A notes, GBP10.5m of Double A rated Class B notes andGBP10m of Single rated Class C notes. Paragon will retain aGBP4.5m Class D piece, and a GBP6m First Loss Fund.

Lead managers are Lloyds, Macquarie and Morgan Stanley, thepanel of banks from last year's deal.

WHEN DOES IT PAY?

Paragon is marketing the deal with three different averagelife scenarios - securitisations pay off when the underlyingassets are repaid, so predicting the cashflows of the bondsdepends on assumptions about how quickly borrowers refinance.

If Paragon calls the bonds on the first call date, theywill have weighted average life of 2.9-years in the Class Anotes and 3.2-years in both Class B and C.

In the second scenario, the bonds see 5% constant prepaymentrate (CPR) - or the rate at which borrowers prepay theirmortgages - for the first four years, followed by 15% afterthat, assuming the issuer does not call.

If Paragon does not call, all free cashflows from theportfolio 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, butno acceleration of prepayments. This gives 6.8-years on theClass 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 thisis split between completed loans and post-offer pre-completionloans, which account for some GBP49.83m of the total. Thecharacteristics of each pool are similar, with the combined poolfeaturing no arrears, a 69.14% loan-to-value ratio, 0.3-yearsseasoning, and GBP166k average loan size.

(Reporting By Owen Sanderson and Anil Mayre; editing by AlexChambers and Matthew Davies)

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Keywords: RMBS\PARAGON