Shares of Paragon plunged yesterday after the buy-to-let mortgage lender said the credit crunch could force it into a £280m rights issue to stop it running out of funding.
The company also said lending volumes for the first half of 2008 would be about half the year-earlier level and said it would not pay a final dividend this year. Paragon announced 60 job cuts at its mortgage-processing office in Epsom.
Paragon's shares lost half their value and were suspended by the London Stock Exchange to ensure an orderly market before closing down 39 per cent. Britain's third-biggest buy-to-let lender said the cost of funding in the credit market was too high as lenders asked for 90 basis points more than the sky-high inter-bank rate to renew its £280m credit line.
The company said that UBS, the Swiss bank, had agreed to underwrite a rights issue if needed.
Paragon has pulled products that had become unprofitable as funding costs rose. Like Northern Rock, Paragon relies on the wholesale money markets rather than savers' deposits to fund its lending. Securitisation markets for parcelling up mortgages and selling them to investors are "effectively closed to new issuance", Nigel Terrington, Paragon's chief executive, said.
Mr Terrington said the rights issue would be "precautionary" rather than an emergency fundraising. But analysts said Paragon could wait until February to see if the securitisation markets reopened; if not, it would have to sell itself or wind down.
Liquidity remained scarce yesterday as the key rate at which banks lend to each other over three months rose to a two-month high of 6.48625 per cent.
Banks have been reluctant to lend to each other since the start of the credit crunch because they do not want to get caught without funds to meet obligations to clients or finance structured investment funds. The rate had eased last month because institutions thought the worst of the credit crunch might be over but after a series of extra write-downs by banks in the US, banks are hoarding cash ahead of their financial year-ends.
Bradford & Bingley eased its cash flow by selling £4.2bn of housing association and commercial property loans. The bank sold its housing association loans at book value to Dexia, a Belgian bank, and unloaded £2bn of commercial loans at a discount to GE Real Estate.
The bank said it had planned to sell the loans since before the credit crunch to focus on less capital-intensive and more profitable residential mortgages and savings. But the sale will add to the bank's liquidity amid fears of funding shortages caused by the credit crunch. The shares rose by 9 per cent before closing up by 3.1 per cent.
Bradford & Bingley is another lender that has increasingly tapped the credit markets for its funding in recent years. Fears about its funding have caused the bank's shares to suffer since the credit crunch bit in August.
The bank said yesterday that it continued to raise money on the capital markets and was "well funded". The sale of the loans will generate a loss of between £15m and £40m.