Potential takeover of buy-to-let lender Paragon by private equity group

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by Lin Freestone

Shares in Paragon, a leading provider of specialist finance for property investors, have fallen by almost 90% in the past year as a result of the credit crunch. Although Paragon announced record profits in 2007, it is facing severe difficulties raising money.

Back in November 2007, Paragon advised its shareholders that unless it raised an extra £280m over the following few months there was a possibility of collapse. The lender relies entirely on the wholesale money markets to fund its mortgage business, and the cost of this funding has risen dramatically.

Paragon was the first UK mortgage lender to launch a deeply discounted rights issue when it raised £287m in February at an issue price of 100p per share.

There is speculation that Paragon is in talks with private equity group Blackstone about a potential takeover, which has caused its shares to rally, rising by almost 50% in a week.

Blackstone is one of the world’s leading private equity groups, with headquarters in New York. Its interest in Paragon indicates that it believes the financial turmoil is creating opportunities for buying bargains in the mortgage market.

Paragon is one of the largest lenders in the residential property investment sector, funding one in every ten buy-to-let loans.

Paragon Mortgages introduced its first buy-to-let mortgage in 1995 and since then has increasingly specialised in the private rented sector and in lending to professional landlords in particular. Buy-to-let now accounts for 100% of new lending and the vast majority of its existing portfolio of loans.