Solihull buy-to-let mortgage specialist Paragon has lost two fifths of its market value after appealing to shareholders for cash to overcome a funding crisis.
The group, whose problems have been made worse in recent weeks by short-sellers looking to profit from the global credit crunch, saw its shares plunge by 40.5p, or 40 per cent to 61.5p, valuing the business at £70.6 million.
The shares have now lost more than three quarters of their value since the scale of its funding problems emerged in November. The latest sell-off was sparked by Paragon's announcement that it was looking to raise £287 million by offering investors the opportunity to buy ten new shares for every one they currently hold.
The rights issue is priced at a 90 per cent discount to Thursday's closing price, Paragon said.
The specialist lender - the country's third largest buy-to-let mortgage group - has been forced into such an extreme move because it has £280 million corporate lending facility due for repayment next month.
It had arranged a stand-by rights issue, but was hoping to find alternative ways to raise the cash. But Paragon said yesterday that it was left with no choice but to go to shareholders with escalating costs in the wholesale credit markets and the repayment deadline looming.
Problems began to stack up late last year when the wholesale credit markets, a key source of funds, froze up in reaction to the US subprime mortgage meltdown.
Fears that the company, which grew out of the former National Home Loans business and which employs about 600 people at Solihull, faced potential collapse plunged its share price to ten year lows in late November.
Ironically, the meltdown came soon after Paragon announced record profits and amid indications that its borrowers - predominantly experienced private landlords with sizeable portfolios and low loan-to-value committments - were still doing well despite the slowdown in the housing market.
It said yesterday that its "high quality loan assets" left it well placed in the current market conditions.
Its "rigorously applied conservative credit approval criteria", which means advancing no more than 85 per cent of the market value of a property, means that delinquent loans, three months or more in arrears, account for only 0.18 per cent of the book.
Paragon said the long-term prospects for the private rented sector remain sound in view of demand for homes and supply restrictions.
New lending, however, is expected to be put on hold from the end of February if the wholesale markets do not recover.
Paragon’s new lending is is financed by a £2.3 billion "warehousing" facility from a banking syndicate, but the group said it had been unable to agree "commercially acceptable terms".
Robert Dench, chairman of Paragon, said: "The board believes the rights issue will provide Paragon with a platform from which it can pursue further funding, so the company can return to writing significant volumes of profitable business when credit markets reopen.
Despite having a similar funding model to that of Northern Rock, Paragon has been at pains to point out that that's where similarities to the stricken bank end.
The company, whose main mortgage business is centred on Solihull, said in November that it was to shed more than 60 jobs at an office in Epsom. There have suggestions that the group could sell off some or all of its retail loan book to help bridge the funding gap.