One of Britain’s biggest buy-to-let lenders warned shareholders yesterday that it could collapse if it failed to raise an extra £280 million, prompting fears of a knock-on blow to the housing market.

Trading in Paragon shares was suspended yesterday morning after they plummeted by more than 50 per cent to 100p on the news that the lender needed to raise cash via a rights issue after the credit crunch had made borrowing from other banks too expensive.

The stock closed down almost 39 per cent to 125p.

If the rights issue does not go ahead and it cannot raise money elsewhere, Paragon said that there was “significant doubt” about the company’s ability to continue as a going concern.

Nigel Terrington, the chief executive, said that the UK’s third-biggest buy-to-let lender would cut lending and raise mortgage rates next year as a result, leading to concerns about a hit to the property market.

Charcol, the mortgage broker, predicted that the increased cost of borrowing for people who invest in residential property would lead to cuts of up to 15 per cent in the value of inner-city flats in some cities in the first half of next year.

Ray Boulger, head of technical services at Charcol, said that a combination of a 20 per cent drop in demand and an expected surge in distressed sellers – both triggered by the increased cost of buy-to-let borrowing – would play into the hands of opportunisitic buyers by next spring.

He said: “The professional buy-to-let investors and first-time buyers could put in cheeky bids of 10 per cent to 15 per cent off the asking price” Paragon has a rolling £280 million loan, provided by a syndicate of banks, that it uses as working capital.

The loan comes due at the end of February and Paragon said yesterday that the syndicate had offered to continue lending only at “unattractive” rates.

Yesterday three-month sterling Libor, the rate at which banks lend to each other, hit a two-month high as banks squirrelled away cash.

Global market volatility and worries about the US sub-prime mortgage crisis have made banks reluctant to lend to each other in recent months.

Paragon said yesterday that UBS, the Swiss bank, had agreed to underwrite a £280 million rights issue, to be completed by next February, to replace the loan.

The rights issue will then be sub-underwritten by a group of Paragon’s institutional investors.

Paragon will pay UBS £513,000 a week in return for keeping the underwriting agreement open until February. But Mr Terrington said that he hoped instead to raise the £280 million in the debt markets.

In a double hit to Paragon, another vital funding line will become more expensive next February. Paragon funds its lending in part by a so-called warehouse facility. It stores mortgages in the warehouse in return for loans to fund new business.

It has £1.4 billion still to draw down on in the warehouse but at the end of February the rate for borrowing will rise from 22.5 basis points above Libor to 67.5 basis points above.

Mr Terrington said that although the rise was bearable, he hoped to renegotiate the facility or look elsewhere.

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