The collapse in Paragon shares

The collapse in Paragon shares<?xml:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" />

The value of shares in Paragon Group, <?xml:namespace prefix = st1 ns = "urn:schemas-microsoft-com:office:smarttags" />Britain’s third largest buy-to-let mortgage provider, has collapsed as the business reported difficulties in raising a new tranche of finance. Paragon has had to arrange a £280m rights-issue which involves issuing new shares because it was finding it very difficult to secure the loans necessary to meet its short term funding requirements. It is another example of how the credit crunch is taking effect through financial markets. And we see from the accompanying chart just how ruthless the stock market can be when reacting to this kind of news.

Paragon faced the challenge of renewing its loan facilities in February of next year – but the events of recent months mean that fresh loan finance is more costly to find. The boom in the buy to let market in the UK housing sector has been one of the remarkable changes in the sector over the last decade. Today’s Independent wonders whether the buy-to-let boom is now coming to an end. Paragon has no retail deposit base (i.e. it does not seek to attract deposits from savers as a base finance for lending out), instead it has to rely on borrowing money through the (money) credit markets.

Two of the top four buy-to-let mortgage providers have effectively crashed in the last three months. There will be no government bail out for Paragon which now faces a desperate battle for survival.

Suggestions for more reading

BBC news: Paragon hit by finance problems http://news.bbc.co.uk/1/hi/business/7103254.stm