REG - Paragon Grp Co PLC - Final Results <Origin Href="QuoteRef">PARA.L</Origin> - Part 3
24/11/2015 07:02
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effectively translating the euro notes into a LIBOR linked sterling liability.
The average interest margin on the transaction, taking swap costs into account
was 1.23% and the proceeds were used to pay down existing warehouse debt. The
Group retained £7.5m of class E notes and also invested £7.5m in the first
loss fund, bringing its total investment to £15.0m, or 5.0% of the issued
notes.
After the year end, on 20 October 2015, a Group company, Idem Luxembourg (No.
8) entered into an agreement to issue £117.3m of sterling floating rate notes
to Citibank NA on a limited recourse basis. These notes bear interest at a
rate of one month LIBOR plus 3.50%. The Group investment in this company to
support these notes was £84.9m. The facility was used to refinance existing
Idem Capital borrowings and to refinance further existing Idem Capital
unsecured loan assets and is secured on those assets.
After the year end, on 19 November 2015, a Group company, Paragon Mortgages
(No. 24) PLC, issued E125.0m of euro mortgage backed floating rate notes and
£253.0m of sterling mortgage backed floating rate notes to external investors
at par. The euro notes were class A1 notes, rated AAA by Fitch and Aaa by
Moody's and bearing interest at 1.10% above EURIBOR. £208.3m of the sterling
notes were class A2 notes, rated AAA by Fitch and Aaa by Moody's, £19.3m were
class B notes, rated AA by Fitch and Aa2 by Moody's and £25.4m were class C
notes rated A by Fitch and A1 by Moody's. The interest margins above LIBOR on
the sterling notes were 1.50% on the A2 notes, 2.45% on the B notes and 3.20%
on the C notes. Cross-currency basis swaps were entered into at the time of
the transaction, effectively translating the euro notes into a LIBOR linked
sterling liability. The average interest margin on the transaction, taking
swap costs into account was 1.75% and the proceeds were used to pay down
existing warehouse debt. The Group retained £8.8m of class Z notes and also
invested £8.7m in the first loss fund, bringing its total investment to
£17.5m, or 5.0% of the issued notes.
As with the Group's existing securitisation borrowings, these financings are
structured so that payments of interest and principal are limited to cash
generated from the funded assets and there is no recourse to other Group
funds. Therefore the issue of these new borrowings do not impact on the
liquidity risk of the Group.
During the year ended 30 September 2014 the facility provided by Macquarie
Bank plc to Paragon Fourth Funding was renewed on substantially the same terms
with a reduced margin of 1.750% above LIBOR, with effect from 12 December 2014
for a further two year period, and on 8 May 2015 the facility was increased
from £250.0m to £300.0m. Also during the year, on 15 May 2015 the facility
provided by Lloyds Bank to Paragon Fifth Funding was increased from £200.0m to
£350.0m on its existing terms.
On 26 September 2015, a Group company, Paragon Seventh Funding Limited,
entered into an additional £200.0m committed sterling facility with Bank of
America Merrill Lynch International Limited. This facility is secured on all
the assets of Paragon Seventh Funding Limited and is available for drawings
and redrawings until 8 October 2017. Loans originated in this warehouse are
refinanced in the mortgage backed securitisation market from time to time when
appropriate. This facility bears interest at a rate of three month LIBOR plus
1.30%. The facility has a renewal process that allows the Group to agree a new
commitment period prior to the expiry of the existing commitment period. As
with the other warehouses, repayments on this facility are limited to
principal cash received from the funded assets.
On 11 February 2013 the Company inaugurated a £1,000.0m Euro Medium Term Note
Programme under which it may issue retail bonds, or other notes, within a
twelve month period. The prospectus was updated, renewing the programme for a
further twelve month period on 23 October 2014 and in August 2015 £112.5m of
sterling bonds were issued through it. These bonds are listed on the London
Stock Exchange, carry a fixed interest rate of 6.0% per annum and are
repayable in August 2024, but are callable at the option of the Company. This
issue raised £111.3m of cash, net of issue costs.
Repayments made in respect of the Group's borrowings are shown in note 22.
19. CONTINGENT LIABILITIES
Over recent years, in common with other financial services firms, the Group
has followed guidance issued by the FCA in respect of redress to customers in
respect of the misselling of payment protection insurance ('PPI'), though the
sums involved have not been material.
In November 2014 the UK Supreme Court handed down its decision in Plevin v
Paragon Personal Finance Limited ('Plevin'), which addressed potential
liability in respect of PPI claims under section 140 of the Consumer Credit
Act 1974, where commission charged to the customer was particularly high. On 2
October 2015 the FCA published a statement outlining proposed rules addressing
the handling of PPI cases in the light of the Plevin decision and including a
deadline beyond which no further new PPI claims would be required to be
considered.
The Group has reviewed its current exposure to PPI claims in the light of the
Court's judgement in Plevin and the draft FCA rules and its current
expectation is that it will suffer no material additional costs from PPI
claims. However, this assessment is based on our current interpretation of
both the Plevin judgement and the draft rules, which may be revised before
finalisation, while interpretations may develop as both the judgement and the
rules are implemented. Therefore it is possible that the maximum possible
liability may be greater, but it is impracticable to evaluate the potential
impact at this stage.
20. net cash flow from operating activities
2015 2014
£m £m
Profit before tax 134.2 122.8
Non-cash items included in profit and other adjustments:
Depreciation of property, plant and equipment 1.5 1.6
Amortisation of intangible assets 1.4 1.3
Foreign exchange movement on borrowings (30.8) (194.5)
Other non-cash movements on borrowings 4.8 4.9
Impairment losses on loans to customers 5.6 12.3
Charge for share based remuneration 4.5 3.2
Net (increase) / decrease in operating assets:
Loans to customers (810.9) (462.2)
Derivative financial instruments 33.8 196.1
Fair value of portfolio hedges (4.7) (0.5)
Other receivables 0.4 0.3
Net increase / (decrease) in operating liabilities:
Retail deposits 648.6 60.1
Derivative financial instruments 5.6 (0.2)
Other liabilities 2.7 2.7
Cash (utilised) by operations (3.3) (252.1)
Income taxes (paid) (22.6) (17.4)
(25.9) (269.5)
21. net cash flow from investing activities
2015 2014
£m £m
Purchases of property, plant and equipment (0.7) (25.1)
Purchases of intangible assets (1.2) (0.7)
(Increase) in short term investments (1.7) (39.4)
Net cash (utilised) by investing activities (3.6) (65.2)
22. net cash flow from financing activities
2015 2014
£m £m
Shares issued (note 13) 1.5 -
Dividends paid (note 15) (29.1) (23.7)
Issue of asset backed floating rate notes 823.8 862.8
Repayment of asset backed floating rate notes (638.3) (450.2)
Issue of retail bonds 111.3 123.9
Movement on bank facilities 24.8 85.1
Purchase of shares (56.9) (1.4)
Net cash generated by financing activities 237.1 596.5
23. COST:INCOME RATIO
Cost:income ratio is derived as follows:
2015 2014
£m £m
Cost - operating expenses 71.2 63.4
Total operating income 211.5 197.9
Cost / Income 33.7% 32.0%
Cost:income ratio excluding Paragon Bank is derived as follows:
Note 2015 2014
£m £m
Cost - operating expenses 71.2 63.4
Paragon Bank operating expenses 4 (9.5) (6.3)
61.7 57.1
Total operating income 211.5 197.9
Paragon Bank operating income 4 (0.9) 0.1
Total operating income 210.6 198.0
Cost / Income 29.3% 28.8%
24. UNDERLYING PROFIT
Underlying profit is determined by excluding from the operating result any
identified costs of a one-off nature, which do not reflect the underlying
business performance of the Group, and fair value accounting adjustments
arising from the Group's hedging arrangements.
2015 2014
£m £m
Paragon Mortgages
Profit before tax for the period (note 4) 93.6 81.1
Less: Fair value losses / (gains) 0.4 (0.6)
94.0 80.5
Idem Capital
Profit before tax for the period (note 4) 49.3 48.1
Less: Fair value losses / (gains) - -
49.3 48.1
Paragon Bank
(Loss) before tax for the period (note 4) (8.7) (6.4)
Less: Fair value losses / (gains) 0.1 -
(8.6) (6.4)
Total
Profit before tax for the period (note 4) 134.2 122.8
Less: Fair value losses / (gains) 0.5 (0.6)
134.7 122.2
25. RETURN ON TANGIBLE EQUITY EXCLUDING PARAGON BANK
The underlying ROTE excluding Paragon Bank is calculated as follows:
Note 2015 2014
£m £m
Profit for the year 107.1 97.2
Amortisation of intangible assets 1.4 1.3
Adjusted profit for the year 108.5 98.5
Loss of Paragon Bank 4 8.7 6.4
Tax thereon at effective rate for the year (1.8) (1.3)
Adjusted profit after tax 115.4 103.6
Average tangible equity 3 950.5 902.0
Return on Tangible Equity excluding Paragon Bank 12.1% 11.5%
26. Average NET MARGIN
The average net interest margin is calculated as follows:
Note 2015 2014
£m £m
Opening loans to customers 9 9,255.9 8,801.5
Closing loans to customers 9 10,062.4 9,255.9
Average loans to customers 9,659.2 9,028.7
Net interest 197.4 179.4
Net interest margin 2.04% 1.99%
Impairment provision 5.6 12.3
Impairment as a percentage of average loan balance 0.06% 0.14%
27. RELATED PARTY TRANSACTIONS
In the year ended 30 September 2015, the Group has continued the related party
relationships described in note 62 on page 171 of the Annual Report and
Accounts of the Group for the financial year ended 30 September 2014. Related
party transactions in the period comprise the compensation of the Group's key
management personnel, transactions with the Group Pension Plan and fees paid
to a non-executive director in respect of his appointment as a director of the
Corporate Trustee of the Group Pension Plan. There have been no changes in
these relationships which could have a material effect on the financial
position or performance of the Group in the period.
Save for the transactions referred to above, there have been no related party
transactions in the year ended 30 September 2015.
The Paragon Group of Companies PLC
STATEMENT OF DIRECTORS' RESPONSIBILITIES
in relation to financial statements
The responsibility statement below has been prepared in connection with the
full annual accounts of the Company for the year ended 30 September 2015.
Certain parts of these accounts are not presented within this announcement.
The directors are responsible for preparing the Annual Report and the
financial statements in accordance with applicable law and regulations. The
directors are required to prepare accounts for the Group in accordance with
International Financial Reporting Standards ('IFRS') and have also elected to
prepare company financial statements in accordance with IFRS. In respect of
the financial statements for the year ended 30 September 2015, company law
requires the directors to prepare such financial statements in accordance with
International Financial Reporting Standards, the Companies Act 2006 and
Article 4 of the IAS Regulation.
International Accounting Standard 1 - 'Presentation of Financial Statements'
requires that financial statements present fairly for each financial year the
Company's financial position, financial performance and cash flows. This
requires the faithful representation of the effects of transactions, other
events and conditions in accordance with the definitions and recognition
criteria for assets, liabilities, income and expenses set out in the
International Accounting Standards Board's 'Framework for the Preparation and
Presentation of Financial Statements'. In virtually all circumstances, a fair
presentation will be achieved by compliance with all applicable International
Financial Reporting Standards. Directors are also required to:
· properly select and apply accounting policies;
· make an assessment of the ability of the Group's and the Company's
ability to continue as a going concern;
· present information, including accounting policies, in a manner that
provides relevant, reliable, comparable and understandable information; and
· provide additional disclosures when compliance with the specific
requirements in International Financial Reporting Standards is insufficient to
enable users to understand the impact of particular transactions, other events
and conditions on the entity's financial position and financial performance.
The directors are responsible for keeping proper accounting records which
disclose with reasonable accuracy at any time the financial position of the
company, for safeguarding the assets, for taking reasonable steps for the
prevention and detection of fraud and other irregularities and for the
preparation of a directors' report and directors' remuneration report which
comply with the applicable requirements of the Companies Act 2006.
The directors are responsible for the maintenance and integrity of the
Company's website. Legislation in the United Kingdom governing the preparation
and dissemination of financial statements differs from legislation in other
jurisdictions.
The directors confirm that, to the best of their knowledge:
· the financial statements, prepared in accordance with International
Financial Reporting Standards as adopted by the European Union, give a true
and fair view of the assets, liabilities, financial position and profit or
loss of the Company and of the Group taken as a whole;
· the Directors' Report, including those other sections of the Annual
Report incorporated by reference, comprises a management report for the
purposes of the Disclosure and Transparency Rules, which includes a fair
review of the development and performance of the business and the position of
the Company and the undertakings included in the consolidation taken as a
whole, together with a description of the principal risks and uncertainties
that they face; and
· the Annual Report, taken as a whole is fair, balanced and understandable
and provides the information necessary for shareholders to assess the Group's
performance, business model and strategy.
Approved by the Board of Directors and signed on behalf of the Board.
PANDORA SHARP
Company Secretary
24 November 2015
Board of Directors
R G Dench J A Heron F J Clutterbuck
N S Terrington A K Fletcher H R Tudor
R J Woodman P J N Hartill
The Paragon Group of Companies PLC
PRINCIPAL RISKS AND UNCERTAINTIES
The principal risks to which the Group is exposed and which could impact
significantly on its ability to conduct its business successfully are
summarised below.
Category Risk Description
Business Economic A severe downturn in the UK would impact on demand for loans, customer ability to pay and security values
Concentration The Group is particularly exposed to the performance of the UK private rented sector, through its buy-to-let activities
Competition Operating in actively competitive markets, profitability or market share could be eroded by competitor activity
Credit Customer Lending may be incorrectly targeted or customers may become less able to service debt, exposing the Group to loss
Counterparty Failure of an institution holding the Group's cash deposits or providing hedging facilities for risk mitigation could expose the Group to loss or liquidity issues
Conduct Fair outcomes Failure to deliver appropriate customer outcomes would impact on the Group's reputation and its financial performance
Operational People Failure to retain appropriately skilled employees would impact upon the Group's ability to deliver its business plans
Systems Substantial IT systems are required to support the operations of the Group and guard against cyber risks. Failure in these systems might result in loss
Regulation The Group operates in sectors which are highly regulated and are becoming more so. Compliance failures would risk financial and reputational damage
Liquidity and Capital Funding Inability to raise new funds could restrict lending, while changes in the retail savings market could impact the liquidity of Paragon Bank
Market Interest rates Reduction in margins between market lending and borrowing rates or mismatches in the Group balance sheet would impact profit
Pension Obligation Pensions The obligation to support the Group's defined benefit pensions plan might deplete resources
The Group has considered and responded to all of these risks, mitigating the exposure as far as practicable.
This information is provided by RNS
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