The share price is up sharply this morning in good volume even after its recent excellent run. There was talk in April last year but it never took off. If it is American(as the press said) I would guess General Electric are the most likely bidders. Has anybody heard anything?

Outlook not bright for KGN...


Kensington Group PLC
22 November 2006


Pre-Close Trading Statement

22 November 2006

Kensington Group plc ('Kensington') today issued a trading statement ahead of
the close period relating to the year ending 30 November 2006.

Summary

In 2006, Kensington has continued to show solid growth particularly in its newer
markets in Ireland and second-charge mortgages in the UK. Credit performance has
been encouraging and is on track to deliver an improved performance from 1H2006
in the critical areas of arrears, losses and the overall bad-debt charge.
However, the value from new business lending in the UK first-charge mortgage
market has continued to decline as competition has reduced margins and lower
income is being received from early redemption charges. As a result, pre-tax
profits for 2006 are likely to be within analysts' expectations but towards the
lower end of the range.

Trading Update

During 2006, Kensington has continued to deliver on its strategy of managed
growth in the UK specialist mortgage market while investing in attractive new
markets in the UK and Europe:

New Business completions for Kensington for the eleven months to 31
October 2006 were over 3.7 bn, up more than 19 % on the same period in 2005 and
the offer pipeline at the end of October 2006 was over 430m, up over 15 % from
12 months ago.

Competition has been most intense in the first-charge UK mortgage
businesses of Kensington Mortgages and Money Partners ('MPL') from both new
entrants and existing lenders. Against this background, Kensington has chosen to
maintain its prudent lending policies and manage margin reduction in its
first-charge business. As a result, new business completions in UK first-charge
mortgages for the eleven months to 31 October 2006 have been 7% higher than the
same period in 2005.

The direct-to-consumer distribution business, TML, continues to deliver
low volumes of mortgage completions to Kensington Mortgages. Over the eleven
month period it generated 5% of the total new business completions for the
Group. TML's cost-base has been reduced further but the cost of origination, for
Kensington, via this distribution channel remains high. A new Managing Director
was appointed in July 2006 and all aspects of the TML business model are being
reviewed including the potential growth opportunities for its broker facility.
The level of goodwill held on the Group balance-sheet for this business will be
reviewed.

Second-charge lending in the UK (MPL) and first-charge lending in
Ireland (Start Mortgages) delivered strong growth over the eleven month period.
New business completions for these markets are over 100% ahead of the same
period in 2005.

Gross new business margins for the Group have remained stable at 3.3%
over LIBOR. In UK first-charge lending this has fallen by 0.3% to 2.7% whilst
origination costs have remained broadly unchanged, both driven by increased
competition. Gross margins in second-charge lending in the UK have reduced to
8.0% in 2006 from 8.3% in 2005. Margins in Start have remained at 3.7% over ECB.

Rates of customer redemptions for UK first-charge mortgages have
remained at the lower levels seen since the end of 2004. More customers are
choosing to remortgage outside the early redemption charge period and, for the
eleven months to 31 October 2006, this has reduced the average income per
redemption to 2.8% compared to 4.4% in 2005.

The decrease in new business margins and falling redemption income has
reduced the value of new first-charge mortgages and has also led to lower
premiums on whole-loan sales during 2H 2006.

Credit Risk Management and Operational Performance

Kensington continues to adopt a careful and disciplined approach to
lending. Its new business risk profile remained prudent with an average
loan-to-value ratio of 77 % across the Group.

Following continued success from its collections management strategy,
credit performance has been encouraging in a challenging risk environment. The
percentage of mortgages more than 90 days in arrears and losses per repossession
have fallen modestly over the period and, as a result, the Group bad-debt charge
for the 2H 2006 is expected to be lower than the charge for 1H 2006.

The mortgage book has continued to grow and as at 31 October 2006 stood
at 7.1bn

Kensington continues to operate efficiently and, in 2006, expects to
operate at a lower cost per mortgage asset under management than in 2005

Funding

The demand for Kensington securitisations continues to be strong and in
the first eleven months of FY 2006 Kensington issued 1.65bn of bonds. The
overall initial cost of funds increased slightly to 0.33% over LIBOR compared to
0.30% in 2005 due to a higher proportion of 2nd charge mortgages.

The demand for whole loan sales continues to increase and, for the
financial year to date, the Group has sold portfolios of loans totalling 1bn,
including the most recent transaction of 210m in November 2006. Given the
capital efficiency of this model, we expect to use loan sales as a growing and
complementary funding approach to securitisation.

Outlook

Kensington expects that it will see lower levels of growth in pre-tax profits in
2007 when compared to the growth seen in 2006.

In response to the competitive challenges facing the core UK businesses, the
Group is making good progress to reinforce its leading position in the UK market
and develop new income streams in attractive new markets.

Kensington Mortgages has successfully launched a pilot of specialist
prime first-charge mortgages and has sold specialist prime mortgages in two
recent whole loan sales. This incremental, capital efficient income stream is
expected to be rolled out more widely in 2007.

Kensington Personal Loans has successfully completed its first
second-charge loans, is extending into new intermediary partners and is expected
to make a positive contribution to group earnings from 2007

In November 2006, Kensington increased its equity stake in Money
Partners (MPL) by 37.5% to 57.5% to increase the Group's share of the income
from MPL. The additional equity was purchased at an initial cost of 13.1m with
deferred consideration of up to a maximum of 11m due in 2009, depending on
performance.

Start Mortgages has accelerated its growth programme and broadened its
products and distribution sources. This business is expected to contribute
materially to Group earnings growth from 2007 as a result of our 64% stake in
the business.

In April 2006, Kensington acquired a minority stake in Bluestep, the
only non-conforming lender in Sweden at a cost of 2.7m providing the Group with
an entry into this attractive, under-developed market. This business is now
operating profitably and showing encouraging growth.

Oh dear, not looking good is it......I hold no position


From Daniel Stewart this morning :

Target price and forecasts under review

KGN has this morning announced that profits in coming years will be below current market estimates. The CEO, John Maltby is also stepping down with immediate effect.

We note the following:

As previously flagged, unlikely that a buyer will emerge;

CEO stepping down a sure sign that there are serious problems with the quality of the business and the prospects;

the strategy of selling more books of business is highlighted as a reason for profits being below market expectations. This in itself raises a number of questions: I) are management trying to sell as much of their poorer quality books as possible ii) have potential suitors said not interested in the business as a whole because of question marks about the quality of the business as a whole but they are interested in buying those books that appear to be in better health? Iii) is the Group struggling with funding? Iv) do management anticipate the costs of funding rising?

whatever the situation, and it is likely to be a combination of factors including, increased competition, deteriorating credit quality and lower early redemption fees, the picture is not pretty. Management are unsure of where profits are likely to be, how can shareholders therefore make a decision as to whether or not to retain their holdings. In the absence of any clarity we recommend SELL.

My market area.
This co-incides with a very poor business decision some time ago.
Kensington decided that the FSA TCF regime gave them the opportunity to disallow packaging of their business by many 3rd party packagers. They also reduced rates on their product to entice clients, working on the theory that best advice meant brokers and introducres would be forced into recommending Kensington product. They funded this reduction by a corresponding reduction in broker commission.
The idea was that while they would reduce their margin, they would massively increase volume. In fact they managed to reduce both margin AND volume as brokers found reason to recommend other lenders, whose commission was higher. Wrong, but human nature.
Now they are in the unenviable position of less new lending, meaning smaller books, and fixed rates that are unattractive as secured bonds etc.
All stemming back to not realising that the sub-prime market, at the client facing end, is very different to the FSA view of it.
It is all made worse because US lenders were sniffing around Kensington as a good entry to the UK market. Kensington thought that high volumes were the key to a successful sale. Not so. The US wanted the business model mainly, with the volumes produced at the rates then. Disatisfied, they have entered by creating their own model, based on Kensington as was.
The only way back is to buy the borrowers from the brokers, and that is going to be painful as they raise rates and re-instate the old commission levels. The truth is, even that may not be enough as other lenders have made the proposition and brokers have grown familiar with them, so will continue to use them.
All IMO, but I do know this business very well.
Alan

Thanks Alan, a good insight to a steady decline that no-one else appears to have noticed (in the company, etc). I don't hold, as it was always "too much" for my understanding and somehow I'm not too sure about lending to people who are on the edge of being a bad-risk....but what do I know?

-It just shows that self-interest is still the no1 driver Directors had better NEVER forget..... After all, that's why they have their noses in the trough! You'd think that would be One Fact they'd know deep down.

SELL at all cost! Now 640p.