The UK’s Paragon Banking Group has submitted an application to the Financial Conduct Authority to issue covered bonds after having completed structuring, as it seeks to increase wholesale funding flexibility while moving away from residential mortgage-backed securities issuance.

In its preliminary results announcement for the year ended 30 September this week, the specialist lender said that it expects the FCA application process to be completed in the coming financial year.

Moody’s last Friday assigned first time deposit and issuer ratings to Paragon Bank and Paragon Banking Group, of Baa2 and Baa3, respectively, and the group said that obtaining the ratings and its covered bond plans are part of its work to develop increased optionality around its wholesale funding.

Paragon noted that wholesale funding constitutes the smallest share of its overall funding since it received its banking licence in 2014. This is set to fall further as remaining TFSME funding reduces, while Paragon has significantly cut its reliance on RMBS issuance, such that it no longer has any external securitisation indebtedness.

Funding by type (£m) 30 September 2016-2024

Source: Paragon

Paragon Bank and the group already both had BBB+ issuer default ratings from Fitch. When affirming the ratings in February, the rating agency cited “a funding profile that remains stable through a more challenging economic period” among factors that could contribute to positive rating actions. It noted that while Paragon’s funding profile continued to improve as it grew its retail deposit base, deposit resilience had not yet been tested through a period of deposit-market pressure.

In its announcement, Paragon also noted that, having hitherto principally held liquidity in the form of Bank of England deposits, it this year diversified into Gilts and UK covered bonds.

As of end-September, Paragon, which focuses on the buy-to-let sector, had £13.42bn (€16.18bn) of mortgage loan assets, with £1.49bn of new mortgage lending in the prior 12 months. It also had £2.29bn of commercial loans, with £1.24bn of new lending.

Perenna is also working towards entering the UK covered bond market, albeit with a funding model unique for the country.

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