Paragon, the buy-to-let mortgage provider, is aiming to raise £287 million by offering shares to investors at a 90.2 per cent discount to yesterday’s closing price of 102p.

The rights issue comes as the lender expects its main financing facility to stop advancing funds from the end of next month, leading to a moratorium on the writing of most new business.

Shares in the company plunged 40 per cent, closing at 61½p.

Paragon said that the proceeds will be used to repay a £280 million loan due on February 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 in November. Like Northern Rock, it relied entirely on the wholesale markets to finance its lending but has been unable to continue raising money since US sub-prime worries prompted the credit markets to ease up in August.

Robert Dench, the chairman of Paragon, said: “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.”

Paragon is seeking new sources of funding but if it can’t find any, mortgage business will be restricted to 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.

Since alerting the market to its problems, the lender has continued to operate profitably as 90 per cent of its income is made on the back of its existing loan book.

The emergency rights issue, which offers investors 25 shares for one, comes at a time when the housing market is slowing and as the Northern Rock crisis continues. There are also concerns that many buy-to-let owners will pull out of the market.

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

The company referred to the uncertainty in the housing market but said it believed that long-term prospects for the private rented sector remained sound. 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 the following day.

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