Solihull-based buy-to-let mortgage lender Paragon (PAG) has said it is holding “exploratory” talks with parties interested in buying the troubled company.
Although Paragon, one of the first UK lenders to fall victim to the credit crunch, did not name potential buyers, it was reported that US private equity giant Blackstone was one of the interested firms.
Shares in Paragon jumped after the announcement, closing up 26p at 110p.
Paragon’s stock had dropped by 87 per cent since August 2007 as the firm’s profitability has been squeezed by the increased cost of raising funds.
Paragon said in a statement: “In view of the recent press speculation, the board of Paragon confirms that it has received approaches from parties who have expressed interest in evaluating potential offers for the company.
The firm said it was providing certain due diligence access to potential buyers, but added “there can be no certainty that these discussions will lead to any offer being forthcoming”.
Blackstone declined to comment on the speculation.
Any move by Blackstone could be an indicator that private equity firms still see opportunities in the UK’s mortgage market, despite recent turmoil.
Analysts said UK banks were unlikely to bid for Paragon due to its focus on buy-to-let mortgages, seen as carrying a higher risk of default in a falling property market than mainstream home loans.
Oriel Securities analyst Keith Baird said: “It doesn’t look like a bank at this stage.’’
“I think this is an opportunistic punt on the rental market.
“Rental demand is rising on the back of the inability of young buyers to get into the property market, and that could make Paragon’s spread over the cost of funding positive again.’’
Paragon’s announcement comes just weeks after another US private equity firm, Texas Pacific Group, pulled out of its planned £179 million investment in buy-to-let specialist Bradford & Bingley following a downgrade of the lender’s credit rating.
Shore Capital stockbrokers said Texas Pacific and Clive Cowdery, the founder of closed life fund business Resolution, may also be interested.
It added in a note: “In our view, a deal is a definite possibility and should not be ruled out.
“At current trading levels, Paragon trades at a significant discount to reported net asset value and its run-off value.
“While there may have been concerns over how its buy-to-let book would perform in a falling UK housing market, recent updates from the company and Moody’s (the credit rating agency) suggest that it has, so far, shown resilience.”
In a trading update issued last week, Paragon reported an “exemplary” performance from its buy-to-let loans, saying its customers were benefiting from increased rents and yields as house purchases slow in the current environment.
It said: “The group remains financially strong and well positioned to manage its portfolio and business activities in the deteriorating economic environment.”
Paragon said its third quarter margins had improved slightly over the first half of the year despite continuing disruption in the money markets.
Paragon was the first UK mortgage lender to tap shareholders for cash after falling victim to the freezing up of the wholesale money markets.
In January it was forced into a deeply discounted rights issue in order to raise £287 million to repay a credit facility.
The troubled company has also axed 150 jobs, including 93 staff in Solihull, reflecting its lower level of activity in a buy-to-let market constrained by the troubled credit markets.
Paragon, which emerged from the old Solihull-based National Home Loans business, specialises in particular to lending to professional landlords.
Buy-to-let accounts for all new lending and the vast majority of its existing portfolio of loans.