20th Nov 2007 07:02
Paragon Group Of Companies PLC20 November 2007 Under embargo until Stock Exchange announcement: 7am, Tuesday 20 November 2007 PARAGON PRELIMINARY RESULTS --------------------------- The Paragon Group of Companies PLC ("Paragon"), the UK specialist buy-to-let andconsumer finance lender, today announces its preliminary results for the yearended 30 September 2007. Highlights Financial Performance--------------------- •Pre-tax profit up 9.9% to £91.0m (2006: £82.8m) •Fully taxed earnings per share up 11.8% to 57.7p (2006: 51.6p) •Cost:income ratio falls to 25.2% (2006: 25.8%) Funding------- •Refinancing secured through equity standby underwriting for up to £280.0m Operations---------- •Buy-to-let advances up 34.3% to £4,079.3m (2006: £3,038.3m) •Buy-to-let portfolio up 39.1% to £10,031.3m (2006: £7,212.3m) •Buy-to-let arrears low and stable Commenting on the results, Nigel Terrington, Chief Executive of Paragon, said: "The Group has achieved record profits in 2007, the majority of which havearisen from the Group's buy-to-let businesses, a sector with strong creditdefensive qualities and long-term growth prospects, reflecting increasingstructural demand for rented property in the UK. The current environment, whilst immensely disruptive, is driven by market-widefunding concerns and the actions taken by the Group will ensure that theembedded value in the business is protected whilst providing a base for futureprofitable lending when credit markets recover." For further information, please contact: The Paragon Group of Companies PLC Fishburn HedgesNigel Terrington, Chief Executive Morgan BoneNick Keen, Finance Director Andy BerryTel: 0121 712 2024 Tel: 020 7839 4321 Mobile: 07767 622967 UBS Investment BankAdrian HaxbyChristopher SmithTel: 020 7568 8000 ________________________________________________________________________________ The Paragon Group of Companies PLC PRELIMINARY ANNOUNCEMENT The year to 30 September 2007 was highly successful for the Group from a tradingperspective, with pre-tax profits, fully taxed earnings, business volumes andloan assets all growing strongly and the Group continuing to increase its marketshare within the buy-to-let sector whilst maintaining asset quality. However thedeep turmoil in the credit markets is affecting the normal financing activitiesof the business. Whilst we expect the credit markets to recover from the currentdistressed position during 2008, the timing and extent of the recovery will havean impact on our outlook. In the Funding section we discuss the position of thecredit markets and its impact on our business and financing. Discussions have taken place with our lending banks for renewal of our £280.0million corporate facility, but the terms available are not attractive, asdiscussed later in this announcement. To ensure that the facility is repaid whenit falls due in February 2008, thereby protecting the embedded value of theGroup's assets for shareholders, we have entered into a standby underwritingagreement with UBS, supported by a group of our institutional shareholders. Thisagreement provides us with the ability to launch an underwritten rights issuefor up to £280.0 million until 27 February 2008 unless satisfactory alternativefunding arrangements have been put in place prior to that time. The main termsof this agreement are detailed in the Funding section below. During the year, profit on ordinary activities before taxation increased by 9.9%to £91.0 million from £82.8 million in the previous year. However, owing to thereduction in the rate of corporation tax to 28% from next year, the Group'sdeferred tax assets have been written down, resulting in a one-off increase inthe charge rate to 31.0% from a particularly low rate of 16.9% last year.Earnings per share therefore decreased to 56.8p (2006: 61.2p), whilst on a fullytaxed basis (note 4) earnings per share increased by 11.8% to 57.7p (2006:51.6p). Total advances by the Group increased by 30.0% to £4,436.4 million (2006:£3,412.6 million), of which £4,079.3 million were buy-to-let advances (2006:£3,038.3 million), an increase of 34.3% over the year. Total loan assets at 30September 2007 increased by 31.0% to £11,034.9 million from £8,426.6 million at30 September 2006. In view of the possibility of a rights issue in the near future, the Boardconsiders that it would be inappropriate to return any capital to shareholdersuntil a refinancing has been completed; hence the Group will not pay a finaldividend. The Board will reconsider the Company's distribution policy once thefunding position for the future is clarified. ________________________________________________________________________________ The Paragon Group of Companies PLC PRELIMINARY ANNOUNCEMENT (Continued) FUNDING Current funding and environment The Group's lending is funded largely by the securitisation of loan assets,accounting for £9.9 billion of the Group's liabilities at 30 September 2007. Newlending is financed by a £2.3 billion warehouse facility provided by a bankingsyndicate of which £932.0 million was drawn as at 30 September 2007 (2006:£1,112.0 million). In addition, a corporate facility of £280.0 million, alsoprovided by a banking syndicate, is used to fund the Group's working capitalrequirements together with a long-term bond issue of £120.0 million due in 2017.The Group is not a deposit taker and has no retail depositor base. Our use of securitisation substantially reduces the Group's liquidity risk bymatching the Group's funding maturity profile to the profile of the relatedassets. Since the floating rate liabilities are matched with floating rateassets which are predominantly LIBOR-linked or fixed rate assets hedged by theuse of interest rate swap or cap agreements, the Group's margins are largelyprotected against movements in market interest rates, underpinning the value ofthe Group's investments in the portfolios and the ongoing margin derived fromthe loan assets. The warehouse facility is an asset backed revolving credit line at a margin formortgages of 22.5 basis points over LIBOR. The revolving period expires on 29February 2008, after which date no new drawings may be made to fund new loancompletions, although warehouse assets would be funded to maturity at a marginover LIBOR of 67.5 basis points for mortgages with the characteristics of apublic securitisation SPV. The cost of this facility is not unattractive incurrent market conditions and we would expect the assets within it to generatepositive margins over their residual lives. The £280.0 million corporatefacility falls due for repayment on 27 February 2008. It is currently priced at90 basis points above LIBOR. We have conducted extensive discussions with our lending banks for the renewalof the corporate facility and extension of the revolving period of the warehousefacility. Whilst terms for renewal have been offered in principle, they are notattractive for a variety of reasons, including the high cost of such facilitiesin the current market environment and the short-term nature of the termsavailable. ________________________________________________________________________________ The Paragon Group of Companies PLC PRELIMINARY ANNOUNCEMENT (Continued) The disruption of the capital and banking markets that has spread fromdifficulties in the United States sub-prime mortgage market has had asignificant effect on the cost and availability of credit. Since the summer thesecuritisation markets have been effectively closed to new issuance and, at thesame time, banks have become less willing to renew facilities in the ordinarycourse. A small number of securitisation transactions were completed in earlyNovember by UK and European issuers, which may be the first signs of a return tonormality. We expect the credit markets to recover during 2008 but, in themeantime, we have adjusted our business activities in response to the currentdisruption. This is discussed fully in the Business Review and Strategy section. Limitations on new funding impact on the value created from new originationsrather than on the value embedded within the existing portfolio. This embeddedvalue is represented by the net assets of the business and also the value of thefuture income stream match-funded to maturity. We are concerned that renewal offacilities on the proposed terms would jeopardise shareholder value. The Boardhas therefore taken the decision to enter into a standby agreement with UBSwhich gives the Company up to the end of February 2008 to launch a fullyunderwritten rights issue to raise up to £280.0 million. This both ensures thatcurrent shareholder value does not dissipate and also provides time for theCompany to explore all potential options for the refinancing of the corporatefacility and new warehouse facilities. This process may include furtherdiscussion with the Company's lending banks, releasing excess credit enhancementheld within our securitisation SPVs, asset sales and alternative fundinginstruments. The objective will be to create a stable funding platform for theGroup which adequately protects net assets and the value of future revenues fromthe existing SPV assets for shareholders and to secure new sources of funding toallow the profitable creation of income streams from our lending originations tocontinue. Standby underwriting agreement Under the standby agreement, the Company has the right to require UBS tounderwrite, in full, a rights issue of up to £280.0 million, before 27 February2008. The issue or offer price of any new shares will be determined at the timeof launch of the issue in the light of the then prevailing market conditions. ________________________________________________________________________________ The Paragon Group of Companies PLC PRELIMINARY ANNOUNCEMENT (Continued) The obligation of UBS is subject to normal conditions, including all relevantapprovals for the rights issue, including shareholder approval, being obtained;the absence of any material adverse change affecting the Group; and the absenceof any force majeure event. Such conditionality gives rise to a materialuncertainty related to events or conditions which may cast significant doubt onthe Group's ability to continue as a going concern and, therefore it may, if itis unable to satisfy these conditions and in the absence of other fundingalternatives, be unable to realise its assets and discharge its liabilities inthe normal course of business. On this basis we expect the report of the auditors on the 2007 financialstatements to contain a modified opinion including an emphasis of matterparagraph in relation to going concern. Securitisation activity in the year Prior to the present period of market turmoil, the Group was an active issuer inthe capital markets. In October 2006, a £1.5 billion buy-to-let securitisationwas completed by Paragon Mortgages (No. 13) PLC; in January 2007, a £268.6million securitisation to repackage certain older, owner-occupied, loan assetswas completed by First Flexible (No. 7) PLC; in March 2007, a further £1.5billion buy-to-let securitisation was completed by Paragon Mortgages (No. 14)PLC; and in July 2007, a £1.0 billion buy-to-let securitisation was completed byParagon Mortgages (No. 15) PLC. For the avoidance of doubt, Paragon has no involvement in the US mortgage marketnor any investment, directly or indirectly, in US sub-prime mortgage backedsecurities, specialised investment vehicles, collateralised debt obligations orsimilar vehicles. ________________________________________________________________________________ The Paragon Group of Companies PLC PRELIMINARY ANNOUNCEMENT (Continued)FINANCIAL REVIEW CONSOLIDATED INCOME STATEMENT For the year ended 30 September 2007 (Unaudited) 2007 2006 £m £m Interest receivable 747.5 550.8Interest payable and similar charges (591.7) (407.9) _________ _________Net interest income 155.8 142.9Income from associates 0.2 -Other operating income 28.9 30.6 _________ _________Total operating income 184.9 173.5Operating expenses (47.7) (45.4)Provisions for losses (50.5) (47.8) _________ _________ 86.7 80.3Fair value net gains 4.3 2.5 _________ _________Operating profit being profit on ordinary activities before taxation 91.0 82.8Tax charge on profit on ordinary activities (28.2) (14.0) _________ _________Profit on ordinary activities after taxation 62.8 68.8 ========= ========= Dividend - Rate per share 8.0p 17.0pBasic earnings per share 56.8p 61.2pDiluted earnings per share 54.7p 58.4pFully taxed basic earnings per share 57.7p 51.6pFully taxed diluted earnings per share 55.6p 49.3p ========= ========= The Group is organised into two major operating divisions: First Mortgages,which includes the buy-to-let and owner-occupied first mortgage assets and othersources of income derived from first charge mortgages; and Consumer Finance,which includes secured lending, car and retail finance and the residualunsecured loan book. These divisions are the basis on which the Group reportsprimary segmental information. This is a change from the basis reported in 2006in that the closed, owner-occupied first mortgage book, which at 30 September2007 amounted to £293.8 million, and the closed, unsecured book of £56.9million, both of which comprised the "Other Operations" category last year, arenow included within the First Mortgages and Consumer Finance segmentsrespectively. For reporting purposes these books were absorbed within theresults from the two main business areas because their reduced size had renderedthe Other Operations segment insignificant in terms of assets, revenue and netprofits. ________________________________________________________________________________ The Paragon Group of Companies PLC PRELIMINARY ANNOUNCEMENT (Continued) The operating results of these adjusted business segments are detailed fully innote 3 to the financial information and are summarised below. 2007 2006 £m £mOperating result (Unaudited)First Mortgages 81.8 60.5Consumer Finance 9.2 22.3 _________ _________ 91.0 82.8 ========= ========= During the year, we saw four quarter point increases in base rates and, byvirtue of a market expectation of rising rates, three-month LIBOR, inparticular, has been higher than base rates throughout the year. This has had anadverse impact on margins, most noticeably in the Consumer Finance division,where pricing is primarily set against base rates. In addition the change inbusiness mix in favour of first mortgages, which are of higher credit qualitythan consumer finance loans, has resulted in a slight narrowing of overallmargins, although margins within the first mortgage businesses have remainedbroadly similar to those in 2006. The growth of the loan book resulted in netinterest income increasing by 9.0% to £155.8 million from £142.9 million. Partially compensating for this, the rising interest rate environment had apositive effect on fair value net gains of £4.3 million (2006: £2.5 million),which have arisen from the IFRS requirement that movements in the fair value ofhedging instruments attributable to ineffectiveness in the hedging arrangementsshould be credited or charged to income and expense. Other operating income reduced slightly to £28.9 million, from £30.6 million in2006 attributable to a reduction in activity within the Consumer Financedivision, where other operating income decreased by 22.4%. This was offset by anincrease of 19.5% within First Mortgages as a result of increased buy-to-letactivity during the year. An increased proportion of this income has arisen fromfees rather than commissions, reflecting a continuation of the decline ininsurance related income in the Consumer Finance division reported last year. Our continuing focus on cost effectiveness has resulted in a further reductionin the cost:income ratio, to 25.2% from 25.8% (note 14). Operating expenses were£47.7 million, compared with £45.4 million for 2006. ________________________________________________________________________________ The Paragon Group of Companies PLC PRELIMINARY ANNOUNCEMENT (Continued) The charge for loss provisions of £50.5 million compares with £47.8 million for2006. As a percentage of loans to customers the charge, at 0.46%, is lower thanthe charge of 0.57% for 2006. Of the total charge, only £3.7 million, or 7.3%,relates to First Mortgages, with £1.5 million of this relating to the closed,owner-occupied book. The charge in respect of Consumer Finance includes amountsin respect of income which, although accounting standards require it to berecognised, is not expected to be received by the Group and hence also increasesthe charge for loan impairment. Under UK GAAP such income was not recognised.The loan book continues to be carefully managed and the arrears performanceremains in line with our expectations, with the performance of the buy-to-letbook remaining exemplary. The effective tax rate, at 31.0%, is slightly higher than the normal corporationtax rate. This results from applying the reduced future corporation tax rate of28% to the Group's deferred tax assets, which are expected to unwind over aperiod of up to ten years. We expect the charge to be at or slightly below thecorporation tax rate next year. Profits after taxation of £62.8 million have been transferred to shareholders'funds, which totalled £313.3 million at the year-end. BUSINESS REVIEW AND STRATEGY FIRST MORTGAGES The year ended 30 September 2007 was another strong year for buy-to-let and theprivate rented sector, with demand for rented property running at high levelsall year. The Royal Institution of Chartered Surveyors confirmed in Septemberthat landlords were experiencing record rental growth and that surveyorsexpected further strong growth in the coming months. Similarly the latestresearch from the Association of Residential Letting Agents ('ARLA'), alsopublished in September, reported tenant demand outstripping supply in all areasof the rental market. Both organisations noted that tenant demand has beenboosted by higher borrowing costs and growing uncertainty in financial marketsas well as high levels of migration from the European Union. ________________________________________________________________________________ The Paragon Group of Companies PLC PRELIMINARY ANNOUNCEMENT (Continued) The latest data published by the Council of Mortgage Lenders ("CML") supportsthe picture of a strong buy-to-let sector, both in absolute terms andparticularly when set against a softening owner occupier market. According tothe CML, buy-to-let lending represented 12% (£21.2 billion) of all new mortgageadvances in the first half of 2007, the highest proportion since the launch ofbuy-to-let in 1996. Furthermore, the stock of buy-to-let mortgages increased to£108 billion, an increase of 14% since the second half of 2006, with buy-to-letaccounting for 1 in 10 of all outstanding mortgages. This clearly reflects thescale of the private rented sector in the United Kingdom relative to the housingmarket as a whole. The CML data also confirms the continuing superior creditquality of buy-to-let mortgages, with both arrears and possessions significantlylower than for the market in general. The CML attributes this qualitydifferential in part to persistently strong tenant demand, shorter void periodsand rising rents. During the year ended 30 September 2007 Paragon's two buy-to-let brands, ParagonMortgages and Mortgage Trust, both benefited from these strong tradingconditions. Buy-to-let mortgage advances by the Group were £4,079.3 million forthe year (2006: £3,038.3 million), an increase of 34.3%. This strong lendingperformance produced a 39.1% increase in buy-to-let assets to £10,031.3 millionfrom £7,212.3 million. This strong growth has its roots in the two distinctpropositions offered by our two brands and in the excellent relationships themortgage business has developed with individual intermediaries and mortgageadviser networks. Paragon has been successful in focusing on distribution andservice and has maintained its strong stance on credit quality, with the arrearsperformance of the book remaining exemplary. In response to the recent difficulties in the credit markets, we have takensteps to reduce the origination flow whilst the cost of funding from the capitalmarkets remains uncertain, so as to limit the risk of writing new business atunprofitable margins. This has been achieved by the withdrawal of a number ofour first mortgage products and by increasing the pricing on others. Weanticipate that volumes in the first half of 2008 will be around half the levelsin the corresponding period of 2007. The slow down is being managed carefullywith products directed at key intermediary relationships who have the potentialto provide increased volumes when markets stabilise, as well as providingcontinuing new lending support for our existing landlord customers. The rate of redemptions remained low during 2007, at a similar level to 2006, atjust under 15%. ARLA's September survey data continues to demonstrate thatlandlords, on purchasing properties for rental, expect to hold the propertiesfor an average of sixteen years. ________________________________________________________________________________ The Paragon Group of Companies PLC PRELIMINARY ANNOUNCEMENT (Continued) As part of the Group's aim to ensure that we are operationally efficient, we arerationalising our first mortgage processing function. This will result in themigration of Mortgage Trust's new business processing function from Epsom toSolihull, from where we will support both brands. This will be likely to resultin a reduction of more than 60 positions in our Epsom office. The owner-occupied book reduced to £293.8 million from £431.5 million during theyear ended 30 September 2007 and performed in line with expectations. During theyear balances with a book value of £4.5 million were sold. Save for themanagement of this book in run-off, there has been little activity in recentyears in this area as the Group has focussed originations on buy-to-let. CONSUMER FINANCE The consumer credit market has remained weak during the year and, as aconsequence, our focus within the Consumer Finance division on the quality oflending rather than on volumes continues to be appropriate. As before, we haverestricted our activities to areas with a low incidence of arrears with anemphasis on secured lending. Aggregate loan advances were £356.8 million during the year, a decrease of 4.2%from £372.4 million in the previous year. As at 30 September 2007, the totalloans outstanding on the Consumer Finance books were £709.8 million, comparedwith £782.8 million at 30 September 2006. Arrears levels continue to remain stable and at low levels, in line withexpectations. Personal finance Secured personal advances were £205.8 million during the year, a reduction of5.6% from £218.0 million for the previous year. Despite the intenselycompetitive environment, a gradual tightening of criteria within the primesecured second charge market has been in evidence as the year has progressed.Whilst this change to a credit stance closer to that of Paragon Personal Financehas led to the business enjoying an improving market position, the overalltightening of criteria has had an adverse effect on the broker-introducedpersonal finance market. We do not, therefore, anticipate that business volumeswill benefit from improved market share in the short term, although we do expectan improvement as we move through 2008. ________________________________________________________________________________ The Paragon Group of Companies PLC PRELIMINARY ANNOUNCEMENT (Continued) Insurance sales continue to diminish in the wake of negative sentiment for theproducts, a trend we expect to continue. To address the fall in commissionrevenue, we have introduced lender arrangement fees and adjusted our loanpricing. We expect further re-pricing when the £25,000 threshold for ConsumerCredit Act regulated lending is abolished in April 2008. The closed unsecured book continues to run down in accordance with ourexpectations. The book totalled £56.9 million at 30 September 2007, compared to£73.1 million a year before. During the period, balances with a book value of£5.3 million were sold and similar disposals are expected in the coming year. Sales aid finance New business volumes were £151.0 million (2006: £154.4 million) and were in linewith our expectations. Both retail and car markets experienced contractingvolumes throughout the year as consumers, concerned about affordability, becamemore wary of committing to large purchases. Given this environment the businessagain tightened its underwriting criteria, the result of which has been afurther improvement in the credit quality of new business. Throughout the year the key focus for the business has been on improvingprofitability and increasing operational efficiency, both of which have beenachieved without compromising service standards or portfolio quality. ________________________________________________________________________________ The Paragon Group of Companies PLC PRELIMINARY ANNOUNCEMENT (Continued) CAPITAL MANAGEMENT During the year the Company bought 1,445,000 shares in the market at a cost of£8.1 million with the result that by 30 September 2007 a total of 6,689,000shares had been repurchased since the buy-back programme was announced in 2005,at a total cost of £39.5 million. Given current conditions and theappropriateness of preserving liquidity, the Board has decided to suspend thebuy-back programme until further notice. Over the period we have continued to reduce the risk profile of the Group's loanassets through a disciplined restructuring of the portfolio from unsecuredtowards less capital-demanding secured lending. In addition, the morecapital-demanding closed books have continued to decline, both from naturalrun-off and from ongoing disposals. Further asset sales may be considered, asappropriate, to supplement the organic run-down strategy. BOARD As we reported last year, Gavin Lickley, a non-executive director since 2002,retired from the Board in October 2006 and we thank him for his service andcommitment during the years of his association with the Group. Jonathan Perry, the former Chairman, retired from the Board in February 2007,after fifteen years of service and Bob Dench was appointed Chairman at thattime. Jonathan Perry led the Group from the early 1990s as it developed itscurrent range of business operations and the Board expresses its thanks to himfor his consistently outstanding performance and contribution. Terry Eccles joined the Board in February 2007 as an independent non-executivedirector. Formerly Vice-Chairman of JPMorgan Cazenove, Terry brings to the Boardconsiderable experience in the financial sector. ________________________________________________________________________________ The Paragon Group of Companies PLC PRELIMINARY ANNOUNCEMENT (Continued) OUTLOOK For the past twelve years the Group has pursued a strategy of careful growth incore markets which offer high quality loan assets, funded portfolio by portfolioto maturity through the securitisation markets. This has produced consistentprofit growth over the period. The Group has achieved record profits in 2007, the majority of which have arisenfrom the Group's buy-to-let businesses, a sector with strong credit defensivequalities and long-term growth prospects, reflecting increasing structuraldemand for rented property in the UK. The present travails of the credit market coinciding with the expiry of oursyndicated credit facilities have created uncertainties over the Group's futurefunding in the near term. Whilst we expect the capital markets to recover during2008, it is important that we manage our new business generation cautiously toensure that new originations remain profitable, but also, fundamentally, toprotect the embedded value in the current portfolio. The strength of profits in 2007 reflects the quality of income generated frommatch-funded assets within existing securitisation vehicles, largely insulated,as they are, from the sharp rise in the cost of credit. However the high costand short-term nature of replacement banking facilities are unattractive in thecurrent environment and we believe they would significantly erode shareholdervalue. For this reason, we have arranged the standby underwriting agreement referred toabove which, if called upon, will enable the repayment of the £280.0 millioncorporate facility due at the end of February 2008. This will provide anopportunity to explore alternative funding sources, and to seek new warehousingarrangements for new lending activity in 2008 and beyond. The prospects of the Group in the current year will depend substantially on thereopening of the securitised funding markets to enable the Group to return tonormal levels of writing new business. If we are unable to secure new warehousefacilities or alternative sources of access to the securitisation market, wewill have to scale back new lending activities significantly and manage costsaccordingly. Over a prolonged period this would have a negative impact on ourfranchise. However, the embedded value of our existing portfolio of assetsremains strong and we expect it to continue to generate sound profits and cashflow in the future. We firmly believe that the private rented sector will continue to see growth formany years to come. The investment required to enable this expansion will haveto be financed and therefore the Group's key products will remain in demand. Thecurrent environment, whilst immensely disruptive, is driven by market-widefunding concerns and the actions taken by the Group will ensure that theembedded value in the business is protected whilst providing a base for futureprofitable lending when credit markets recover. 20 November 2007 ________________________________________________________________________________ The Paragon Group of Companies PLC CONSOLIDATED INCOME STATEMENT For the year ended 30 September 2007 (Unaudited) 2007 2006 Notes £m £m Interest receivable 747.5 550.8Interest payable and similar charges (591.7) (407.9) _________ _________Net interest income 155.8 142.9Share of results of associate 0.2 -Other operating income 28.9 30.6 _________ _________Total operating income 184.9 173.5Operating expenses (47.7) (45.4)Provisions for losses (50.5) (47.8) _________ _________ 86.7 80.3Fair value net gains 4.3 2.5 _________ _________Operating profit being profit on ordinary activities before taxation 91.0 82.8Tax charge on profit on ordinary activities (28.2) (14.0) _________ _________Profit on ordinary activities after taxation for the financial year 62.8 68.8 ========= =========Earnings per share - basic 4 56.8p 61.2p - diluted 4 54.7p 58.4p ========= ========= The results for the current and preceding years relate entirely to continuingoperations. ________________________________________________________________________________ The Paragon Group of Companies PLC CONSOLIDATED BALANCE SHEET 30 September 2007 (Unaudited) 2007 2006 Notes £m £m £m £mAssets employedNon-current assetsIntangible assets 0.6 0.6Property, plant and 21.9 20.2 equipmentInterest in associate 0.5 -Financial assets 5 11,119.5 8,432.9Retirement benefit 4.2 0.3 obligationsDeferred tax asset 16.1 33.6 _________ _________ 11,162.8 8,487.6Current assetsOther receivables 6.7 6.3Cash and cash 6 927.7 622.7 equivalents _________ _________ 934.4 629.0 _________ _________Total assets 12,097.2 9,116.6 ========= =========Financed byEquity shareholders' fundsCalled-up share capital 7 12.1 12.1Reserves 8 358.0 314.6 _________ _________Share capital and 370.1 326.7 reservesOwn shares (56.8) (47.7) _________ _________Total equity 313.3 279.0 _________ _________Current liabilitiesFinancial liabilities 10 280.9 128.0Current tax liabilities 3.1 1.4Provisions 1.4 0.7Other liabilities 111.1 78.2 _________ _________ 396.5 208.3Non-current liabilitiesFinancial liabilities 10 11,379.6 8,619.7Provisions 0.6 3.7Other liabilities 7.2 5.9 _________ _________ 11,387.4 8,629.3 _________ _________Total liabilities 11,783.9 8,837.6 _________ _________ 12,097.2 9,116.6 ========= ========= The preliminary financial information was approved by the Board of Directors on20 November 2007. Signed on behalf of the Board of Directors N S Terrington N KeenChief Executive Finance Director ________________________________________________________________________________ The Paragon Group of Companies PLC CONSOLIDATED CASH FLOW STATEMENT For the year ended 30 September 2007 (Unaudited) 2007 2006 Notes £m £m Net cash (utilised) by operating activities 11 (2,511.6) (1,824.0)Net cash (utilised) by investing activities 12 (6.2) (1.4)Net cash generated by financing activities 13 2,822.7 1,917.8 _________ _________Net increase in cash and cash equivalents 304.9 92.4Opening cash and cash equivalents 622.3 529.9 _________ _________Closing cash and cash equivalents 927.2 622.3 ========= =========Represented by balances within: Cash and cash equivalents 927.7 622.7 Financial liabilities (0.5) (0.4) _________ _________ 927.2 622.3 ========= ========= ________________________________________________________________________________ The Paragon Group of Companies PLC STATEMENT OF RECOGNISED INCOME AND EXPENDITURE For the year ended 30 September 2007 (Unaudited) 2007 2006 £m £m Profit for the year 62.8 68.8Actuarial gain / (loss) on pension scheme 3.4 (0.6)Cash flow hedge (losses) / gains taken to equity (1.4) 1.5Tax on items taken directly to equity (0.5) (0.2) _________ _________Total recognised income and expenditure for the year 64.3 69.5Adoption of IAS 32 and IAS 39 - (72.5) _________ _________ 64.3 (3.0) ========= ========= RECONCILIATION OF MOVEMENTS IN EQUITY For the year ended 30 September 2007 (Unaudited) 2007 2006 Notes £m £mTotal recognised income and expenditure for the year 64.3 69.5Dividends paid 9 (20.1) (16.0)Net movement in own shares (9.1) (24.9)(Deficit) / surplus on transactions in own shares (1.5) 0.6Charge for share based remuneration 2.6 0.6Tax on share based remuneration (1.9) 8.9 _________ _________Net movement in equity in the year 34.3 38.7 Equity at 30 September 2006 279.0 312.8Adoption of IAS 32 and IAS 39 - (72.5) _________ _________Equity at 1 October 2006 279.0 240.3 _________ _________Closing equity 313.3 279.0 ========= ========= ________________________________________________________________________________ The Paragon Group of Companies PLC NOTES TO THE FINANCIAL INFORMATION For the year ended 30 September 2007 (Unaudited) 1. GENERAL INFORMATION The financial information set out in this preliminary announcement has not beenaudited. Although the preliminary financial information has been prepared in accordancewith the recognition and measurement criteria of International FinancialReporting Standards (IFRS), this announcement does not itself contain sufficientinformation to comply with IFRS. The financial information set out in the announcement does not constitute theCompany's statutory accounts for the years ended 30 September 2006 or 30September 2007. The financial information for the year ended 30 September 2006is derived from the statutory accounts for that year which have been reported onby the Company's auditors. These statutory accounts have been delivered to theRegistrar of Companies, contained an unqualified audit report and did notcontain an adverse statement under sections 237 (2) or 237 (3) of the CompaniesAct 1985. The statutory accounts for the year ended 30 September 2007, whichhave been prepared in accordance with IFRS, will be finalised on the basis ofthe financial information presented in this preliminary announcement and will bedelivered to the Registrar of Companies following the Company's Annual GeneralMeeting. This document may contain forward-looking statements with respect to certain ofthe plans and current goals and expectations relating to the future financialcondition, business performance and results of the Group. By their nature, allforward-looking statements involve risk and uncertainty because they relate tofuture events and circumstances that are beyond the control of the Groupincluding, amongst other things, UK domestic and global economic and businessconditions, market related risk such as fluctuation in interest rates andexchange rates, inflation, deflation, the impact of competition, changes incustomer preferences, risks concerning borrower credit quality, delays inimplementing proposals, the timing, impact and other uncertainties of futureacquisitions or other combinations within relevant industries, the policies andactions of regulatory authorities, the impact of tax or other legislation andother regulations in the jurisdictions in which the Group and its affiliatesoperate. As a result, the Group's actual future financial condition, businessperformance and results may differ materially from the plans, goals andexpectations expressed or implied in these forward-looking statements. Nothingin this document should be construed as a profit forecast. A copy of the Annual Report and Accounts for the year ended 30 September 2007will be posted to shareholders in due course. Copies of this announcement can beobtained from the Group Company Secretary, The Paragon Group of Companies PLC,St. Catherine's Court, Herbert Road, Solihull, West Midlands, B91 3QE. ________________________________________________________________________________ The Paragon Group of Companies PLC NOTES TO THE FINANCIAL INFORMATION For the year ended 30 September 2007 (Unaudited) 2. ACCOUNTING POLICIES The preliminary financial information has been prepared on the basis of theaccounting policies set out in the Annual Report and Accounts of the Group forthe year ended 30 September 2006. The business segments reported on have beenrevised as described in note 3. In addition, investments in associated companiesare valued at the Group's share of the net assets of the associate, as requiredby IAS 28 - 'Investments in Associates'. Basis of preparation - Going concern The Group has a £280.0m committed corporate syndicated sterling bank facilitywhich is used to provide working capital. This facility is fully drawn and fallsdue for repayment on 27 February 2008. To enable the repayment of this facilitythe Company has entered into an agreement with UBS, whereby the Company has theright to require UBS to underwrite, in full, an equity financing of up to£280.0m before expenses. The obligation of UBS is subject to the normalconditions, including all relevant approvals, including shareholder approval,being obtained; the absence of any material adverse change affecting the Group;and the absence of any force majeure event. Such conditionality gives rise to amaterial uncertainty related to events or conditions which may cast significantdoubt on the Group's ability to continue as a going concern and, therefore itmay, if it is unable to satisfy these conditions and in the absence of otherfunding alternatives, be unable to realise its assets and discharge itsliabilities in the normal course of business. After making enquiries, the directors have a reasonable expectation that arights issue will be completed or alternative funding will be put in place toenable repayment of the corporate facility and that the Group will have adequateresources to continue in operational existence for the foreseeable future. Forthis reason, they continue to adopt the going concern basis in preparing theaccounts. The financial information set out in this preliminary announcement has beenpresented on a going concern basis. However until the outcome of the proposedrights issue and Group's negotiations with its lenders and their implicationsfor the Group's future funding structure are known, there is materialuncertainty about the appropriateness of this basis of preparation. Thefinancial statements do not include any adjustments that would result if thegoing concern basis were not appropriate. As a consequence of this material uncertainty together with any events that mayarise up to the date that the accounts are to be signed, at the date of issuingthis statement the auditors have indicated to the directors that their auditreport is expected to be unqualified but modified to include an emphasis ofmatter paragraph on this uncertainty which may cast significant doubt on theGroup's ability to continue as a going concern. ________________________________________________________________________________ The Paragon Group of Companies PLC NOTES TO THE FINANCIAL INFORMATION For the year ended 30 September 2007 (Unaudited) 3. SEGMENTAL INFORMATION For management purposes the Group is organised into two major operatingdivisions, First Mortgages and Consumer Finance, which includes secured lending,car and retail finance and the residual unsecured loans book which formed partof Other Operations in the year ending 30 September 2006. These divisions arethe basis on which the Group reports primary segmental information. All of theGroup's operations are conducted in the United Kingdom. This represents a change from the basis reported in 2006 in that the closed,owner-occupied first mortgage book and the closed unsecured book, which togethercomprised the "Other Operations" category last year, are now included within theFirst Mortgages and Consumer Finance segments respectively. For reportingpurposes these books were absorbed within the results from the two main businessareas because their reduced size had rendered the Other Operations segmentinsignificant in terms of assets, revenue and net profits. Financial information about these business segments is shown below. Results forthe year ended 30 September 2006 have been reanalysed between the new segmentsas described above. Year ended 30 September 2007 First Mortgages Consumer Finance Total £m £m £m Interest receivable 629.2 118.3 747.5Interest payable (534.6) (57.1) (591.7) _________ _________ _________Net interest income 94.6 61.2 155.8Income from associates 0.2 - 0.2Other operating income 14.7 14.2 28.9 _________ _________ _________Total operating income 109.5 75.4 184.9Operating expenses (28.1) (19.6) (47.7)Provisions for losses (3.7) (46.8) (50.5) _________ _________ _________ 77.7 9.0 86.7Fair value net gains 4.1 0.2 4.3 _________ _________ _________Operating profit 81.8 9.2 91.0 Tax charge (28.2) _________Profit after tax 62.8 ========= ________________________________________________________________________________ The Paragon Group of Companies PLC NOTES TO THE FINANCIAL INFORMATION For the year ended 30 September 2007 (Unaudited) 3. SEGMENTAL INFORMATION (Continued) Year ended 30 September 2006 First Mortgages Consumer Finance Total £m £m £m Interest receivable 428.8 122.0 550.8Interest payable (356.8) (51.1) (407.9) _________ _________ _________Net interest income 72.0 70.9 142.9Income from associates - - -Other operating income 12.3 18.3 30.6 _________ _________ _________Total operating income 84.3 89.2 173.5Operating expenses (23.7) (21.7) (45.4)Provisions for losses (2.5) (45.3) (47.8) _________ _________ _________ 58.1 22.2 80.3Fair value net gains 2.4 0.1 2.5 _________ _________ _________Operating profit 60.5 22.3 82.8 Tax charge (14.0) _________Profit after tax 68.8 ========= ________________________________________________________________________________ The Paragon Group of Companies PLC NOTES TO THE FINANCIAL INFORMATION For the year ended 30 September 2007 (Unaudited) 4. EARNINGS PER SHARE Earnings per ordinary share is calculated as follows: 2007 2006 Profit for the year (£m) 62.8 68.8 _________ _________Basic weighted average number of ordinary shares ranking for dividend during the year (million) 110.5 112.4Dilutive effect of the weighted average number of share options and incentive plans in issue during the year (million) 4.2 5.3 _________ _________Diluted weighted average number of ordinary shares ranking for dividend during the year (million) 114.7 117.7 ========= =========Earnings per ordinary share - basic 56.8p 61.2p - diluted 54.7p 58.4p ========= ========= Fully taxed earnings per ordinary share is based on earnings calculated byreducing profit before tax for the period by a notional tax rate of 30%, thestandard rate of corporation tax in the United Kingdom. The numbers of sharesused are as shown above. Fully taxed earnings per ordinary share is calculated as follows: 2007 2006 Profit before tax for the year (£m) 91.0 82.8Notional tax at 30% (£m) (27.3) (24.8) _________ _________Fully taxed earnings for the year (£m) 63.7 58.0 _________ _________ Fully taxed earnings per ordinary share - basic 57.7p 51.6p - diluted 55.6p 49.3p ========= ========= 5. FINANCIAL ASSETS 2007 2006 £m £m Loans to customers 11,034.9 8,426.6Fair value adjustments from portfolio hedging (22.8) (14.0) Loans to associate 15.4 -Derivative financial assets 92.0 20.3 _________ _________ 11,119.5 8,432.9 ========= ========= ________________________________________________________________________________ The Paragon Group of Companies PLC NOTES TO THE FINANCIAL INFORMATION For the year ended 30 September 2007 (Unaudited) 6. CASH AND CASH EQUIVALENTS Cash received in respect of loan assets is not immediately available for Grouppurposes, due to the terms of the warehouse facilities and the securitisations.Included within 'Cash and Cash Equivalents' at 30 September 2007 is £875.1msubject to such restrictions (2006: £601.2m). 'Cash and Cash Equivalents' also includes £2.2m (2006: £0.9m) held by theTrustees of the Paragon Employee Share Ownership Plans which may only be used to invest in the shares of the Company, pursuant to the aims of those plans. 7. CALLED-UP SHARE CAPITAL 2007 2006 £m £mAuthorised:175,000,000 (2006: 175,000,000) ordinary shares of 10p each 17.5 17.5 ========= =========Allotted and paid-up:121,493,242 (2006: 121,452,366) ordinary shares of 10p each 12.1 12.1 ========= ========= Movements in the issued share capital in the year were: 2007 2006 Number Number Ordinary shares of 10p eachAt 1 October 2006 121,452,366 120,762,342Shares issued in respect of share option schemes 40,876 690,024 _____________ ____________At 30 September 2007 121,493,242 121,452,366 ============= ============ 8. RESERVES 2007 2006 £m £m Share premium account 71.5 71.4Merger reserve (70.2) (70.2)Cash flow hedging reserve (2.4) (1.5)Profit and loss account 359.1 314.9 _________ _________ 358.0 314.6 ========= ========= ________________________________________________________________________________ The Paragon Group of Companies PLC NOTES TO THE FINANCIAL INFORMATION For the year ended 30 September 2007 (Unaudited) 9. EQUITY DIVIDEND Amounts recognised as distributions to equity shareholders in the period: 2007 2006 2007 2006 Per share Per share £m £mEquity dividends on ordinary sharesFinal dividend for the year ended 30 September 2006 10.1p 7.4p 11.2 8.4Interim dividend for the year ended 30 September 2007 8.0p 6.9p 8.9 7.6 _________ _________ _________ _________ 18.1p 14.3p 20.1 16.0 ========= ========= ========= ========= Amounts paid and proposed in respect of the year: 2007 2006 2007 2006 Per share Per share £m £m Interim dividend for the year ended 30 September 2007 8.0p 6.9p 8.9 7.6Proposed final dividend for the year ended 30 September 2007 - 10.1p - 11.2 _________ _________ _________ _________ 8.0p 17.0p 8.9 18.8 ========= ========= ========= ========= 10. FINANCIAL LIABILITIES 2007 2006 £m £mCurrent liabilitiesFinance lease liability 0.5 0.4Bank loans and overdrafts 280.4 127.6 _________ _________ 280.9 128.0 ========= =========Non-current liabilitiesAsset backed loan notes 9,892.6 7,057.7Corporate bond 115.8 117.9Finance lease liability 13.4 13.9Bank loans and overdrafts 931.7 1,267.9Derivative financial instruments 426.1 162.3 _________ _________ 11,379.6 8,619.7 ========= ========= The Group's securitisation borrowings are denominated in sterling, euros and USdollars. All currency borrowings are swapped at inception so that they have theeffect of sterling borrowings. These swaps provide an effective hedge againstexchange rate movements, but the requirement to carry them at fair value leads,when exchange rates have moved significantly since the issue of the notes, tolarge balances for the swaps being carried in the balance sheet. This iscurrently the case with US dollar swaps, although the credit balance iscompensated for by retranslating the borrowings at the current exchange rate. ________________________________________________________________________________ The Paragon Group of Companies PLC NOTES TO THE FINANCIAL INFORMATION For the year ended 30 September 2007 (Unaudited) 11. NET CASH FLOW FROM OPERATING ACTIVITIES 2007 2006 £m £m Profit before tax 91.0 82.8 Non-cash items included in profit and other adjustments: Depreciation of property, plant and equipment 3.9 3.5 Amortisation of intangible assets 0.2 0.2 Share of profit of associated undertakings (0.2) - Foreign exchange movement on borrowings (208.8) (119.3) Other non-cash movements on borrowings 2.9 5.3 Impairment losses on loans to customers 50.5 47.8 Charge for share based remuneration 2.6 0.6 Loss on disposal of property plant and equipment 0.1 - Net (increase) / decrease in operating assets: Loans to customers (2,658.7) (1,951.2) Loans to associates (15.4) - Derivative financial instruments (71.7) 3.6 Fair value of portfolio hedges 8.8 14.0 Other receivables (4.3) (2.3) Net increase in operating liabilities: Derivative financial instruments 263.8 100.9 Other liabilities 35.1 5.5 _________ _________Cash (utilised) by operations (2,500.2) (1,808.6)Income taxes paid (11.4) (15.4) _________ _________ (2,511.6) (1,824.0) ========= ========= 12. NET CASH FLOW FROM INVESTING ACTIVITIES 2007 2006 £m £m Proceeds on disposal of property, plant and equipment 1.3 1.2Purchases of property, plant and equipment (7.0) (5.2)Purchases of intangible assets (0.2) (0.5)Acquisition of subsidiary undertakings net of cash acquired - 3.1Investment in associated undertakings (0.3) - _________ _________Net cash (utilised) by investing activities (6.2) (1.4) ========= ========= ________________________________________________________________________________ The Paragon Group of Companies PLC NOTES TO THE FINANCIAL INFORMATION For the year ended 30 September 2007 (Unaudited) 13. NET CASH FLOW FROM FINANCING ACTIVITIES 2007 2006 £m £m Dividends paid (20.1) (16.0)Issue of asset backed floating rate notes 4,262.1 3,493.6Repayment of asset backed floating rate notes (1,223.7) (1,906.6)Capital element of finance lease payments (0.4) (0.4)Movement on bank facilities (184.6) 371.5Purchase of shares (11.5) (27.4)Exercise of options under ESOP scheme 0.8 1.9Exercise of other share options 0.1 1.2 _________ _________Net cash generated by financing activities 2,822.7 1,917.8 ========= ========= 14. COST:INCOME RATIO Cost:income ratio is derived as follows: 2007 2006 £m £m Operating expenses 47.7 45.4 _________ _________Cost 47.7 45.4 _________ _________Total operating income 184.9 173.5Fair value net gains 4.3 2.5 _________ _________Income 189.2 176.0 _________ _________Cost:income 25.2% 25.8% ========= ========= This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
Paragon Group