Buy-to-let specialist Paragon crashes

[Bagpuss]

Nov 2007
Fear--x------------Greed

Nov 2006
Fear------------x--Greed

HTH

for similar herd mentality patterns see England and the World cup, from delusion to paranoia

By Bagpuss

[Troll]

I think this just shows how stupidly fickle the market is.

I really cannot understand why a company that is worth (say) 1 Billion pounds and returns a profit of (say) 100 million pounds is suddenly worth half yesterday's value because it announces that it won't, by next year, be worth 1.05 Billion returning a profit of 105 Million.

Assuming that a company is going to grow exponentially, year on year, is a stupid way to value it.

tim

But if there is no growth, then with inflation that is a reduction

[tim123]

I think this just shows how stupidly fickle the market is.

I really cannot understand why a company that is worth (say) 1 Billion pounds and returns a profit of (say) 100 million pounds is suddenly worth half yesterday's value because it announces that it won't, by next year, be worth 1.05 Billion returning a profit of 105 Million.

Assuming that a company is going to grow exponentially, year on year, is a stupid way to value it.

tim

[AtW]

Buy-to-let specialist Paragon crashes

By Philip Aldrick, Banking Correspondent
Last Updated: 11:14am GMT 20/11/2007

Shares in buy-to-let specialist Paragon crashed this morning after warning that it may have to shut down to new business as early as April in response to the drying up of the credit markets.

The bank, which raises all its funds in the wholesale money markets and has no customer deposits at all, watched its shares tumble 80 to 124½p after threatening to close to new business because funding has become too expensive. (AtW's comment: so B2Letters will have less options to remorgage and will have to pay full rates)

Separately, it said it had put in place underwriting for a £280m rights issue that would be used for working capital.

The bank is resorting to a rights issue despite the tumbling share price because the rate of interest being demanded by its banks for the revolving facility, which comes up for renewal on February 27, is punitively high – at 0.9 percentage points above Libor. (AtW's comment: no, punitive is when they break your kneecaps with a hammer, 0.9% over LIBOR ain't punitive)

Analysts were quick to point out that the measures taken were not a foreshadowing of the bank going bust, but an attempt to preserve as much shareholder value as possible in particularly challenging markets.
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The company said the rights issue would "ensure shareholder value does not dissipate and provide time to explore all potential options for the refinancing" of its working capital requirements.

In a clear warning that the bank could be forced into run-off, Paragon said that, although the value of its existing mortgage assets "remains strong", "if we are unable to secure new warehouse facilities... we will have to scale back new lending activities significantly and manage costs accordingly".

Paragon's problems stem from the same crisis that unravelled Northern Rock. Seizure in the securitisation and inter-bank lending markets has made it impossible to raise new funds for growth at a workable interest rate.

However, unlike Northern Rock, Paragon insisted that its existing portfolio is "largely protected against movements in market rates".

Paragon has about £1.4bn of funds left, which should allow it to continue to grow slowly until April or May. To continue to grow after that date, it needs to raise new funds but the revolving facility would result in all its mortgage assets – including the existing portfolio – being repriced.

At the current rate being charged, doing so would erode value in the existing portfolio. As a result, the bank will not raise new funds in order to "ensure that the embedded value in the business is protected".

Detailing its figures, Paragon said it currently has a credit line that provides it a profit on mortgages of 0.225 percentage points above three month Libor, the interbank lending rate. Renewing and extending the facility would mean changing the rate to 0.675 percentage points above Libor – which would effectively crystallise a loss of 0.45 percentage points on all existing mortgages.

However, it is not required to renew the facility if it does not plan any new growth – meaning that the existing mortgage portfolio would continue to make a profit but the bank would be closed to new business.

Analysts said the decision effectively means Paragon will be put into run-off, where it simply runs down the existing mortgages, until the securitisation markets reopen.

The shares have collapsed because they included a large growth premium, which reflected the double-digit annual profit growth it has delivered in previous years.

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The end is not nigh now, but very close actually