Solihull-based buy-to-let mortgage lender Paragon faced possible collapse last night because of the global credit crunch – as it posted record profits.
The group, which employs about 700 people in the West Midlands, became the latest UK victim of the lending freeze when stock market panic resulted in its shares slumping to their lowest level for more than ten years.
They lost 79.25p, or 39 per cent, to close on 125p. The sell-off slashed the company's market value by nearly half to £140 million. Ironically, the company yesterday reported record pretax profits of £91 million in the 12 months to September 30 – a rise of 9.9 per cent – most of which flowed from the buy-to-let business.
Total advances increased by 30 per cent to £4.436 billion during the year. Paragon raises all of its capital from the wholesale credit markets but unlike its stricken bigger rival Northern Rock, which has a similar business model, it does not take in retail deposits from savers and so is under less immediate pressure.
Britain's third-biggest provider of mortgages on rental property said it faced problems in raising new funds and it may need to raise £280 million from shareholders.
Due to the possibility of a rights issue, Paragon said it will not pay a final dividend for 2006/07.
Swiss investment bank UBS is standing by to underwrite the rights issue. But the bank's willingness to do so depends on a number of factors, thus creating a "material uncertainty" which "may cast significant doubt on the group's ability to continue as a going concern".
Paragon said it would tap investors if other funding does not become available by the end of February.
Its shares have crashed by over 70 per cent since the start of September on fears it could face trouble raising funds. Yesterday's crisis cost 60 jobs at Paragon's offices at Epsom in Surrey. The office handles normal mortgage lending, which is being scaled back.
Chief executive Nigel Terrington said lending in the first half of the group's new trading year is likely to halve from a year ago.
He said current funding options were "not attractive" and he would look at "a packaged approach" to get the required funds from several areas.
Paragon does not intend using the rights issue unless it becomes necessary.
"For our business it's not the ideal funding instrument, but it provides a platform to give some comfort and ensure that we can enter into other funding arrangements knowing we've got this to fall back on," said Mr Terrington.
Paragon does not lend to sub-prime borrowers and it sells on the loans it makes as mortgage-backed bonds. It also has a £2.3 billion "warehouse" or short-term loan facility of which £932 million was drawn at the end of September.
Analysts at Cazenove said the company appeared to have sufficient funding in place for four to six months of new lending.
"If debt markets have not reopened, we expect the business will start to run down beyond that point," Cazenove said.
Mr Terrington said he expected markets to reopen for financing in the first quarter of next year.
Paragon's buy-to-let gross lending in the six months to March could drop to £1 billion, half the level of a year earlier, as it drastically scales back asset growth, he said.
"We're in pretty dramatic times," Mr Terrington said.
Paragon, which has assets of some £9 billion, lends mainly to professional landlords who borrow on average about 60 per cent of the market value of their properties and keep them for about 16 years.
Paragon finance director Nick Keen said of the share sell-off: "The panic in the market is indiscriminate at the moment.
"In due course as investors put their heads above the parapet you will get some discrimination between good quality loans and bad." Meanwhile, Northern Rock yesterday received an offer from New York private equity firm JC Flowers.