Paragon acquires Titlestone for £48M

The Board of Paragon Banking Group PLC has announced that it has acquired the entire share capital of Titlestone Property Finance Limited for circa £48 million.  At the same time Paragon is acquiring a portfolio of development finance loans for circa £226 million from a series of special purpose vehicle (SPV) companies.  Titlestone and the SPVs are owned by funds ultimately controlled by Oaktree Capital Management L.P.
Strategic rationale
Paragon has pursued a strategy to diversify into specialist lending markets through a combination of organic start-ups and acquisitions.  It commenced residential development finance lending in 2016 and to date, a total of £118 million has been advanced with a pipeline of a further £130 million.  Balances outstanding are £76 million.
Paragon considers the development finance market to be particularly attractive, with strong long-term growth prospects.  The market benefits from strong underlying demand based on the shortage of housing in the UK and requires a specialist focus on customer requirements, risk assessment and in-life portfolio management.  The acquisition serves to extend the Group’s current development finance business, accelerating and broadening the proposition but maintaining Paragon’s strong controls and credit focus.  Further, the enhanced funding capacity and pricing benefits Paragon brings to Titlestone will help broaden its market opportunity.
The purchase consideration represents a premium of £47.8 million to the net assets of Titlestone and is subject to customary closing adjustments.  The final fair value and goodwill elements of the transaction will be determined as part of the Group’s year end accounting process.  In addition to the portfolio being acquired by Paragon, Oaktree is selling a further portfolio of loans to CarVal Investors, which represents 49% of total gross loan balances at completion.  Paragon will also service this second portfolio.
Titlestone’s lending is written at yields broadly in line with Paragon’s existing development finance business, both of which are higher than the Group’s wider loan portfolio.  Consequently, the acquisition is expected to widen the Group’s net interest margin going forward.  The average yield on the acquired portfolio is approximately 11% and the portfolio will be funded by retail deposits.  The acquisition of Titlestone is expected to have a favourable impact on the Group’s cost to income ratio.
The transaction is expected to enhance Paragon’s post tax profits by a high single-digit percentage in its first full year.  It will not change the Group’s stated dividend policy.
Had the transaction taken place at the 31 March 2018 balance sheet date, the Group’s core equity tier 1 ratio would have been reduced to 13.8% from 15.5%, reflecting the premium being paid and the risk weighting applied to the acquired loan book.  The Group’s total capital ratio would have been 16.4%.
Following the transaction, the remainder of the Group’s 2018 share buy-back programme will be suspended, with the Group’s future capital management plans being assessed at the year end and announced with the preliminary results on 21 November 2018.
Titlestone is a leading provider of residential development finance.  It directly serves a range of small and medium-sized residential property developers and benefits from a highly regarded and experienced management team.
To date Titlestone has committed over £2.2 billion across more than 330 developments, with a strong repeat business rate and an outstanding credit record which fits well with Paragon’s approach to lending.
In the 12 months to June 2018 the business advanced £274 million of new funds to its developer clients.  The pipeline remains strong at a little under £250 million.
UK development finance market
There is a long-term shortage of housing in the UK and government policy is seeking to improve supply through the construction of 300,000 new homes per year by the mid-2020s, a material increase from the levels seen in recent years.  Small and medium-sized house builders account for 41% of all new builds.  However, access to finance remains a major barrier for the majority of SME house builders, as larger lenders continue to retrench from the market.
People and management
The Titlestone team is largely focused on the origination of new loans and with the in-life management of the portfolios.  The team will be combined with Paragon’s existing residential development lending activities under the leadership of Robert Orr, Managing Director of Titlestone and support services will be provided from Paragon’s existing operations.
Nigel Terrington, Chief Executive, said: “This acquisition demonstrates our continued progress in diversifying the Group’s income streams into specialist lending markets.  The UK development finance market represents an excellent long-term opportunity and Titlestone will enable us to accelerate our growth in this area.  The management team have an outstanding track record and the business is a strong cultural and operational fit with our existing development finance business and the wider Group.”
Paragon continues to trade in line with the Board’s expectations and will present its third quarter trading update to the market on 23 July 2018.