Markets live chat transcript for the chat ending at 12:04 on 20 Nov 2007. Participants in this chat were: Paul Murphy (PM) Neil Hume (NH)
PM: Right – welcome to Markets Live, FT Alpahville’s daily markets chat.
PM: Well, chat about our crocked banking sector actually.
PM: Can’t get away from the subject
PM: Neil is here to shed some light
NH: Dim light, I fear
PM: Nah!
PM: But first we’ve got to launch our Xmas charity campaign.
NH: The Lend the Crock a Crutch Campaign.
Readers may also know this former bank as Northern Rock.
PM: Yep, it’s time we gave this former bank our full support.
PM: Well support
NH: to a degree it has. still think it is too high
NH: This is now a sub-quid stock.
NH: price went to a low of 60p
NH: and now down 24.9p at 79.3p
PM: Yikes
NH: that’s another 25% off the Crock’s value
NH: things must be feeling a little uncomfortable round at RAB
PM: Got some flashes here!
NH: and Jon Wood’s trading floor
PM: *JC FLOWERS SUBMITS PROPOSAL FOR NORTHERN ROCK -SOURCE
*JC FLOWERS’ NORTHERN ROCK PROPOSAL INCLUDES 15 BLN STG IN
FUNDING, AT LEAST 1 BLN STG IN EQUITY CAPITAL -SOURCE
*JC FLOWERS’ NORTHERN ROCK PROPOSAL TO INCLUDE OFFER TO
EXISTING SHAREHOLDERS AT NOMINAL VALUE -SOURCE
PM: Got that !?
NH: nominal value
NH: from JC Flowers
PM: So this is the moment to launch the Lend the Crock a Crutch Campaign.
PM: We hope all our readers will support us in this.
PM: We are going to get the ball rolling personally.
NH: FT Alphaville will do it’s bit.
PM: We are – this morning – making a substantial payment in kind to Northern Rock.
NH: Ah, you’ve given them their name back
PM: But there is more.
NH: What we going to do?
NH: Have a Lend the Crock a Crutch day where everyone comes into the office dressed as Mike Ashley or something. A Toonie Day.
PM: 
PM: More concrete even than that.
PM: I can announce here live – on Markets Live – that we are pulling our legal dogs off Northern Rock.
PM: ELLIOT — you are unkind
NH: Regular readers will know that a week ago a temporary injection was placed on us publishing details of the sale memorandum sent out by Rock’s advisers, Citi and Merrill Lynch.
PM: Details we had published earlier are now all over the internet, unfortunately. But we’ve taken them down from here.
PM: But anyway, we were planning to go back to court this week to get the injection – temporary thing, after what is known as a short notice application – overturned.
PM: But we have looked at the reality here.
NH: There has been a boardroom clear out at.
NH: There has been a huge public debate about the safety of taxpayers money in all this
NH: The share price has jack-knifed – again
PM: I think we can feel fully justified in having published this memo – in the public interest.
NH: But look it is time to move on.
NH: Life is too short
PM: And certainly may be too short for poor Northern Rock.
PM: A load of offers are now on the table, even if they have come in below last week’s unfeasible market price.
PM: Here on FT Alphaville we can see no virtue in seeking to distract the new management of Northern Rock from their critical task.
PM: So we are not going to pester them by going back to court and insisting that this historical, short-term order is overturned.
PM: The story has moved on.
NH: And so should we.
PM: 
NH: and so to the next crippled mortgage bank
PM: Oh, don’t.
NH: Well it’s just been ridiculous this morning. The market as a whole has been all over the shop – principally being dragged around by the banking sector.
NH: Yes, it’s more of the same – but we can specifically pin it on Paragon this morning
PM: The former Paragon, you mean.
NH: I do. This is the specialist buy to let mortgage lender.
NH: Back in September – sept 19 – put out a statement basically saying it would meet City expectations on the profits front. But it also said it had no near-term funding requirements.
NH: Now, that statement left some wriggle room – but what has now become clear is that it was completely delusional.
NH: What Paragon has said this morning is that a slew of funding runs out in February and it is being told by its bankers that no fresh money is on offer.
PM: How much money are we talking about here?
NH: Right – first the ok bit.
NH: It has a short £10bn in securitised mortgage assets that trade along at a spread to libor, on which Paragon takes its cut as these mortgages slowly mature. That all seems to be fine.
NH: But there is also a revolving credit line which Paragon calls a warehouse facility worth £2.3bn and which the lender has been using to fund new mortgages.
PM: This is not fine?
NH: In fact it doesn’t currently look as if Paragon can continue writing mortgage business past February.
PM: Hmm. A mortgage bank that doesnt have any money to lend — that doesnt sound smart
PM: But i have got to say
PM: with house prices looking likely to fall in the short term, Im not sure whether anybody sane would be taking out a buy-to-let mortgage over the coming money.
NH: Could have new business line here, tho – Buy-to-Lose-Money mortgages
NH: Yeah, but stay with us for a moment.
NH: Setting that warehouse facility aside it seems Paragon are desperately short of working capital.
NH: Thru UBS they have arranged a standby rescue rights issue to supply £280m. That’s been underwritten.
PM: Oh, right, what has that been priced at?
NH: It hasn’t
PM: What do you mean, it hasn’t. Thought you said it had been underwritten.
NH: It has – but it will be priced at the appropriate market rate in Feb.
PM: Oh, lovely. No wonder the stock’s in freefall.
NH: Price was down at 102p, now off JUST 81.2p at 123p
PM: 
NH: that’s a 40% fall
PM: Risk free, one way short.
NH: Well – been that way.
NH: Although Simon Cawkwell, the bear raider would insist that it is Northern Rock
PM: Evil
NH: Evil Kneivil
NH: He reckons the Rock is probably worth 5p and is the greatest shorting opportunity in his 40 years speculating.
NH: Claims he’s going to bank a million in profits by the time it is done for.
PM: I think that’s disgusting. A naked speculator like Cawkwell benefiting from the troubles a poor mortgage bank like Northern Rock.
PM: I think he should donate his profits to the Lend the Crock a Crutch campaign.
NH: So do I.
PM: But look – on Paragon – got any broker research?
NH: yep and a new nickname
NH: contact just been in touch
NH: PARA GONE
PM:
PM: Stop! Research?
NH: this should sober u up a bit
NH: Numis Securities
NH: Questionable future: Paragon has a £280m corporate facility which expires on the
27th of February. The group has an agreement with UBS to issue an underwritten
rights issue for £280m. At yesterdays closing price this would result in 137m new
shares being issued against the 110m currently in issue. The group would be being
valued at a PE of 7.1x historic earnings post issue but its ability to grow would
remain constrained assuming that credit markets remained closed. This however is
not just a dilution problem as there is a risk that this issue may not go ahead. In the
UBS deal there is a material adverse change clause and any force majeure event
could preclude the deal being done.
NH: A modified opinion of the auditors: The conditionality of the UBS deal resulted in
Paragon stating ‘Such conditionality gives rise to a material uncertainty related to
events or conditions which may cast significant doubt on the Group’s ability to
continue as a going concern and, therefore it may, if it is unable to satisfy these
conditions and in the absence of other funding alternatives, be unable to realise its
assets and discharge its liabilities in the normal course of business.’