OREANDA-NEWS. Fitch Ratings has assigned The Paragon Group of Companies PLC's (Paragon; BBB-/Stable) prospective retail issue under its GBP1bn euro medium term note (EMTN) programme an expected rating of 'BBB-(EXP)'.

The final rating assignment is contingent on the receipt of final documentation conforming to information already received.

KEY RATING DRIVERS
The expected rating is in line with Paragon's Long-term Issuer Default Rating (IDR) of 'BBB-', reflecting the notes' status as senior unsecured obligations. Although the notes rank junior to Paragon's securitised debt obligations, their alignment with the IDR is also based on the adequate availability of unencumbered assets.

In common with Paragon's Long-term IDR, the rating reflects Fitch's view that Paragon's asset quality is strong. In particular, the buy-to-let loan book currently has a very low level of impairment, having been written to conservative criteria and borrower credit profiles then remaining subject to close monitoring. However, impairment could increase should the current benign operating environment become more challenging.

Fitch acknowledges the stability and experience of Paragon's management team, and its success in steering the group through the economic crisis while maintaining profitability. Fitch views the recent strategy of broadening the group's revenues and funding from their historical concentrations in buy-to-let lending and securitisation, respectively, as fundamentally sound. However, relative to the well-established buy-to-let business, the group's track record in its debt purchase business is less proven, and it returned to the car finance market in 2014 after a gap of several years. Some underwriting execution risk remains with regard to the diversification strategy, notwithstanding the demonstrated scope to leverage the group's established infrastructure in collections.

In Fitch's opinion, Paragon's funding profile displays strong defensive characteristics with respect to its predominantly non-recourse and matched tenor nature. The 2014 launch of Paragon Bank has broadened the funding mix by providing access to retail deposits, but the achievement of fully flexible funding diversification remains an ongoing process, as any prolonged contraction in the wholesale markets could still constrain origination and business growth.

RATING SENSITIVITIES
As the rating is aligned with Paragon's IDR, it is primarily sensitive to a change in the IDR itself. The notes' rating is also sensitive to developments in the availability of unencumbered assets, including free cash, as well as the group's leverage and funding mix.

The IDR could be downgraded in the event of a material weakening of Paragon's current strong asset quality. This could arise from problems emerging within the core buy-to-let mortgage book, via the collection profile of a material portfolio within Idem Capital not developing as well as expected at point of acquisition, or through Paragon Bank not progressing to profitability as expected by management.

Should there be a significant reduction in the group's liquidity, through cancellation of warehouse lines, difficulty in attracting deposits or deployment of the group's cash into illiquid investments or acquisitions, this could also have a negative impact on the IDR.

Rating upside is currently limited in view of the still principally buy-to-let driven business profile, but the IDR could benefit over time from proven successful implementation of the group's strategy to broaden earnings. This could be evidenced by the generation of stable recurring profit streams from the Idem Capital and Paragon Bank businesses, while maintaining a robust balance sheet profile and demonstrating ongoing diversification of the funding platform.