Paragon, the buy-to-let mortgage provider, today moved to shore up its troubled business by announcing that it would raise £287 million of working capital through a deeply discounted rights issue.

The lender, which has become the first in the UK to resort to a hugely discounted rights issue, is offering shares to investors at a 90.2 per cent discount to yesterday's closing price of 102p.

The rights issue takes place as the lender expects its main financing facility to stop advancing funds from the end of February leading to a moratorium on the writing of most new business.

Shares in the company plunged 38 per cent in early trading to 63p, giving the company a market value of £72.5 million.

Paragon said that the proceeds will be used to repay a £280 million loan that falls due on Feburary 27, after it failed to find alternative sources of cash. The rights issue has been fully underwritten by investment bank UBS.

The third biggest buy-to-let lender first signalled its problems raising funding in November. Like Northern Rock, it relied entirely on the wholesale markets to finance its mortgage lending but was unable to continue raising finance since worries over US sub-prime loans prompted the credit markets to cease up in August.

"Since November 2007 the corporate facility banks have informed the company that they will not renew or extend the corporate facility and require full repayment on or before 27 February 2008 in accordance with its terms,” Paragon said in a statement.

“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,” Robert Dench, the chairman of Paragon, said in a statement.

Paragon is continuing to seek new sources of funding in order to write new loan business. However, if these are not forthcoming then new mortgage business will be restricted to further advances on existing mortgages financed by available redemption funds in Paragon's special purpose vehicles and a little new consumer lending using existing financing vehicles.

Paragon has already withdrawn some products from the market during November and December, however the board intends to maintain the group's brands, pending a return to more normal credit market conditions.

Since first alerting the market to its problems, the lender's business had continued to operate profitably as 90 per cent of its profits are made on the back of its existing loan book.

Paragon's shares have plunged by 78 per cent in the past year.

The company's crisis rights issue, which offers investors 25 shares for one, comes at a time when the housing market is slowing and as the crisis around Northern Rock, which was forced to borrow from the Bank of England, continues.

There are also concerns that a large number of buy-to-let owners will pull out of the market or reduce the size of their portfolios in the face of rising costs and falling values.

If a qualifying shareholder does not take up the entitlement to new shares, their proportionate shareholding will be diluted by 96.2 per cent, Paragon said.

In its statement, the company referred to the current uncertainty in the housing market but said that it believed that long term prospects for the private rented sector remained sound given demographic demand factors and supply restrictions in the UK market.

An emergency meeting of investors will be held on January 28 to approve the rights issue and it is expected that dealing in the new shares will begin on January 29.

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