Some market observers reckon that Paragon could have issued a successful bond with a lower coupon, given its status as a FTSE 250 company, but it seems the priority was to test the effectiveness of the retail market in raising funds. The company has already indicated at a roadshow that the fundraising is not intended as a short-term refinancing exercise as most of Paragon's lending is backed through to maturity, though the company does have a £110m corporate bond due in 2017.
Investors looking to buy the bond will note that Paragon recently returned to profits growth - pre-tax profits were a record £95m in 2012 - after four lean years in the aftermath of the credit crunch. This reflects the wide margins that specialist lenders were able to charge after banks largely abandoned the market in an effort to preserve their capital. Management also reckons the next few years will see more disposals of loan portfolios by banks who wish to reallocate their capital, in which case a large cash reserve will come into its own. Paragon's overall financial situation looks very sound, the gearing ratio is about 10 times, perhaps half the equivalent for a building society and cash generation at the last results topped £154m.
The offer is open until 26 Feb and investors can subscribe for minimum bundle of £2,000, with multiples of £100 thereafter. There are no complicated covenants, but it should be noted that there is a semi-annual coupon up to September 2020, with an extra coupon for the final 3-month period. Paragon will probably issue between £50m-£75m of bonds.
The 6 per cent coupon looks attractive compared with the 2.3 per cent forecast yield for the dividend, which suggests investors could switch out of the equity if income is a priority. Await documents.
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