Friday, 11 January 2008

Paragon - digging deep

Can Paragon survive after February 27? The prospects look poor. The buy-to-let mortgage provider needs to come up with a hefty £280 million to cover a maturing loan. If it does not find the cash, then Paragon will follow Northern Rock into the abyss.

Today, Paragon scraped the bottom of the financing barrel. In a forlorn attempt to find cash, it offered investors additional shares at a breathtaking 90 percent discount. Paragon hopes that this frantic gesture will stave off bankruptcy.
The news wiped out a fair chunk of existing shareholder value. Once the news got out, Paragon's share price fell 38 per cent, bringing the decline for the year as a whole down to a eye watering 78 per cent.

However, would any sensible investor take up Paragon's offer of these new cheap shares? The company is financing a sector that is just about ready to fall off a cliff. Mortgage volumes are down sharply, and apart from a few self interested estate agents, everyone expects a sizable decline in house prices.

The company itself admits that its strategy amounts to waiting and hoping that things turn out alright. Or as Robert Dench, the chairman of Paragon put it: "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".

If Paragon does go down, it will heighten concerns that the UK is heading for a systematic banking crisis. Other banks look just as vulnerable. There is nothing unique about Paragon and its business model. Like Northern Rock, it was gambling that house prices would just keep on rising. It poured out loans on people who had little idea of the financial risks of property speculation. In the wake of Paragon's slack attitude to risk, there are now too many over-extended buy-to-let amateurs with mortgages that can not be repaid.

It is an obvious point, but banks should only give out loans to those who can repay. Unfortunately for Paragon, the corporate banking sector suddenly remembered the virtue of this simple principle and applied it ruthlessly to the failing mortgage company. If only Paragon had remembered the same principle when that army of uninformed small time speculators came looking for financing.

6 comments:

oldftb said...

Nice piece of writing. Thanks for that.

amigauser said...

I Think you are wrong

Paragon will be bailed out by one of the large financial institutions. They have more to loose by a general loss of faith in the banking sector than by not bailing out Paragon.
You should also remember that Northern Rock was bailed out by the government, so Paragon will also be bailed out, only this time it will be done in private.
Do you think that the Bank of England will agree to buy all of Paragons loans on the quiet, if some bank agrees to buy it.
You still do not seem to recognise that the Government has more to loose by allowing the housing market to deflate than by keeping it inflated by any means

Laplace77 said...

to my favourite UK housing bubble blog...

...I bet you know the music!


the housing bubble's busting now,
busting now, busting now,
the housing bubble's busting now,
busting now, busting now,
my unfair RE Agent


;-)

ukhousingbubble said...

laplace77

Is that ditty to the tune of London Bridge is falling down?

Alice

ukhousingbubble said...

amigauser

I won't discount the possibility that Paragon could be bailed out by another financial institution, I think it is very unlikely. The Northern Wreck experience tells me that there aren't too many firms out there ready to take on a nasty POS like Paragon.

Let us not forget that Paragon is completely financed by the wholesale market. It has no depositors whatsoever. From this I conclude two things; first, the BoE, FSA and HMT might be prepared to let it go to the wall (no ugly queues on the high street); second, the lack of depositor base means that it is less prospects of rebuilding its liabilities while the credit crunch continues.

Thanks for the comments. Although I don't quite agree, it all adds to the debate.

Alice

Anonymous said...

Alice

of course ;)


Laplace77