U.K. buy-to-let lender Paragon has announced a GBP287 million ($563 million) rights issue, which would repay the company's GBP280 million working capital facility due on Feb. 27. Aside from improving its financial situation, the firm can also avoid the penalty interest rates that its financiers were proposing through this offering.

"The fact that they are pursuing the rights issue suggests that the terms offered to renew the existing working capital facility were unattractive," Royal Bank of Scotland analysts said.

At the end of last year, Paragon disclosed that its bankers were looking to increase the cost of its warehouse facility. Paragon's warehousing facilities would increase to around 67 basis points over Libor from February if not renewed. It is currently priced at 22.5 basis points. The rights issue, analysts said, is in effect a 25-for-1 issue at a 90.2% discount to the closing price of 102 pence on Jan 10. UBS was the underwriter on the deal.

Paragon's warehouse facilities will cease to be available to fund new advances at the end of February but will continue to fund existing mortgages. Analysts said it is unlikely that the mortgage lender will be able to extend its warehouse lines until the ABS market reopens, allowing the existing facilities to be refinanced.

"Following wind-down of the credit facility, the lender will effectively be in run-off mode unless it can find a way of issuing in the RMBS markets or alternative funding sources," Deutsche Bank analysts said. Paragon has the highest asset securitization ratio of any publicly listed company in Europe - around 80% of the mortgage provider's current funding is done via the securitization market.

Although Paragon's RMBS continue to perform well in credit terms, with late-stage arrears and defaults remaining exceptionally low, market analysts said it's likely that the outstanding bonds won't be called according to schedule. This exposes investors to extension risk. Paragon 7 can be called from May of this year and Paragon 8 from October, but the bonds will not step up until 2010.

(c) 2008 Asset Securitization Report and SourceMedia, Inc. All Rights Reserved.

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