Talks between landlord mortgage specialist Paragon and private bank Hampshire Trust mark a shift in business strategy for the buy to let lender.
Paragon is a thriving business anchored in providing property investment loans to professional landlords.
The firm is one of few serving property business sectors like houses in multiple occupation (HMOs), blocks of flats, loans to property companies and large portfolios.
Paragon posted a 22.5% increase in full-year profits last month, taking advantage of financial turmoil at the big banks that has reduced their appetite for buy to let lending.
However, Paragon executives faced their own travails after been caught short in the credit crisis and having to shut the doors on new lending for a couple of years.
Problems raising funding
Paragon has a root problem as a lender – it’s not a bank.
That meant that when banks stopped lending during the credit crunch, Paragon was a major casualty.
The small amount of lending that went on was between deposit taking lenders, because they were increasing their capital assets to support the borrowing.
Paragon could only come back to the market after securing funding from Australia – and raises more funds to lend by securitising the loans.
If the global banks hit the buffers again, Paragon will face the same problem and lending might jolt to a halt again.
Striking a deal with Hampshire Trust changes all that. Paragon gains a banking licence from the move.
The banking licence makes Paragon a deposit taker and moves the operation up a notch to allow borrowing on the money markets from other deposit-taking banks.
High risk investment
Paragon confirms talks but denies a done deal. Shares in the company, which have risen by over 60% since May, were up 1.3% at 243.4 pence on the back of the news.
Paragon’s last annual results showed a record pre-tax profit of £95.5 million, up from £80.8 million 12 months earlier.
The final dividend lifted to 4.5p per share, up from 2.65p last year. Added to an interim payment of 1.5p earlier in 2012, the total was 6p for the year.
However, analysts list Paragon as a risky place for money.
“Paragon is a high risk business that has become effectively if not technically insolvent twice,” said James Hamilton of Numis.
“Paragon is highly leveraged and despite this it generates a low return on equity. The underlying return is now just under 9% which we believe is dramatically below the cost of equity.”