Photographer: Chris Ratcliffe/Bloomberg

U.K. Lender Shuns Mortgage-Backed Securities for BOE Funding

Updated on
  • Paragon’s treasurer says company won’t issue RMBS this year
  • BOE allows lenders to borrow at rates close to 0.25 percent

Paragon Group of Companies Plc said it won’t package mortgages into new bonds that can be sold because it’s cheaper to use the Bank of England’s new funding plan.

The U.K. lender won’t issue residential mortgage-backed securities in 2016, “unless the market changes significantly,” Peter Shorthouse, director of treasury and structured finance, said in an interview on Tuesday. This would be the first year the Birmingham, England-based company hasn’t securitized loans since 2010 and compares with three deals in each of the last two years, according to data compiled by Bloomberg.

BOE Governor Mark Carney’s exceptional stimulus package after Britain’s vote to exit the European Union is discouraging mortgage bond issuance because it allows lenders to borrow at interest rates close to the main rate of 0.25 percent. That gives them little incentive to use public debt markets, where investors demand an average yield premium of 120 basis points, or 1.2 percentage points, more than benchmark rates for notes backed by U.K. buy-to-let mortgages, according to Bank of America Corp.

Market Route

“The funding scheme which the government introduced makes it less attractive to take the market route,” said Alexander Batchvarov, the head of international structured finance research at Bank of America Corp. in London. “We are going to see a decline in securitization.”

The 80 billion-pound ($107 billion) market for U.K. mortgage-backed securities contracted by 12 billion pounds in the 12 months through June 30, according to JPMorgan Chase & Co. The government said last month that it will buy back 3 billion pounds of mortgage-backed securities from rescued lender Bradford & Bingley.

Other lenders are still issuing mortgage-backed securities, with Royal Bank of Scotland Group Plc currently arranging a deal backed by U.K. non-conforming home loans.

Paragon, which is trying to fund an expansion of its buy-to-let homes and consumer-lending business, sold 150 million pounds of 7.25 percent bonds this week, its first subordinated-debt sale since the financial crisis.

Though the mortgage bond market’s yield premium has dropped below that reached after the June referendum, “it’s still got some way to go yet before it gets back to levels that are competitive with our alternatives,” Shorthouse said.