It all kicked off after a morning results statement from Paragon. Like Northern Rock, the specialist buy-to-let lender relies on the credit markets for its funding (rather than taking deposits from savers), so its share price has already been slumping in recent weeks amid fears it would run into the same problems – even though its profit expectations have remained on course.
Sure enough, on Tuesday Paragon admitted that one of its credit lines runs out in February, and so far it’s not been able to negotiate a new one. Currently, the only alternative is a rights issue to raise the money from its shareholders – but it wants to avoid that. The result, it says, is ‘a material uncertainty... which may cast significant doubt on the Group's ability to continue as a going concern.’ In other words, if it can’t get its hands on £280m from somewhere quickly, it could be toast.
Paragon’s share price rapidly plummeted by more than 50%, and several other banking stocks got caught in the crossfire – Alliance & Leicester, Barclays and RBS also took a pasting. Northern Rock itself plunged to a new low on Tuesday morning after reports that Cerberus, one of the main contenders, has decided not to bid for it after all (at one point the Rock was trading at a measly 60p, less than 5% of what it was worth a few months ago).