Paragon Group, a U.K. provider of mortgages, personal finance and car loans, recently launched a GBP185 million ($293 million) deal backed by buy-to-let mortgages. The transaction, called Paragon Mortgages (No 2) even though it was the lender's third MBS, was split into two tranches: a GBP165.5 million senior tranche rated Aaa/AAA by Moody's Investors Service and Standard & Poor's and an A2/A tranche worth GBP15.5 million.

ING Barings acted as lead manager for the deal with J.P. Morgan and Royal Bank of Scotland as co-managers.

Pricing for the 4.1-year average life senior tranche was three-month Libor plus 30 basis points and plus 87.5 basis points for the six-year junior tranche. Paragon had hoped for tighter spreads - in a similar deal launched by Paragon in June 1999 the senior tranche was priced at 28 basis points over - but potential buyers were not forthcoming this time round.

Simon Best, head of Western European ABS for ING Barings, said wider spreads should be expected as the market continues to readjust following fears of Y2K breakdown towards the end of last year.

Even though Northern Rock's recent Granite 00-1 MBS was priced tighter at 25 over three-month Libor (ASRI 2/28/1999 p. 9), Best said that Northern Rock was a longer-established company and the deal was backed by mortgages with a lower than usual loan to value ratio. Smaller mortgage lenders will have to accept wider spreads for the time being, he said.

Best also pointed out the buy-to-let nature of the deal did not deter potential investors. Although Moody's prospective ratings report on the deal said that the buy-to let market "may exhibit more volatility over the economic cycle," Best explained that, "Paragon's arrears performance over the last five years has been noticeably better than the U.K. as a whole. Buyers were also encouraged by the company's careful underwriting and credit process."

The majority of investors on this issue were U.K. based but some larger buyers from Germany and the Benelux countries also got in on the act.

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