Paragon has solid virtues

It's fairly predictable that, if there is going to be stock market mayhem, then shares in Paragon will suffer. The company is, after all, exposed to the factors that still spook investors - the wholesale money markets, housing finance and house prices. That's why its share price has tumbled 27 per cent in the past five weeks. And yet nothing much has changed for Paragon.

Indeed, rising demand for rented accommodation from people who can't get the finance to buy their own home is playing straight into Paragon's hands, because lending money to landlords is the group's bread and butter. The biggest risk it faces is a squeeze on wholesale lending and the shutters being pulled down on the securitisation market. Paragon needs to raise wholesale funds to lend on to customers, and it succeeded last year in securing a £200m warehouse facility. Once a decent amount of this is lent out, the loans are bundled together and used as collateral to issue bonds, and the proceeds are used to top up the warehouse facility.

True, the economic outlook is getting gloomy again, but the triple-A notes in a mortgage securitisation are pretty secure. Credit rating agencies stress-test mortgage packages to ensure that interest payments would still be met even if there were a 40 per cent drop in house prices and a rise in defaults to 20 per cent.

Besides, Paragon has already weathered the storm that started with the collapse of Northern Rock. As credit markets dried up and securitisation became a dirty word, Paragon battened down the hatches and set about maintaining shareholder value and preserving cash. Both of these were made easier by its conservative lending criteria. This approach has served it well, and impairment provisions as a percentage of its loan book were just 0.2 per cent in March, well below the industry average. Loan-to-value rates are kept low, typically at around 75 per cent, while Paragon adopts a hands-on approach to a landlord who faces difficulties. First, there will still be a stream of rental income, and management will ensure that this is used to service the mortgage debt. As a last resort, the property itself can be claimed and, thanks to the modest loan-to-value ratio at which Paragon lends, it is usually worth more than the outstanding mortgage.

Paragon's financial health is also becoming more robust - its 'free' cash (ie, not pledged to a securitisation) rose from £128m to £180m in the year to the end of March. Furthermore, shareholders' funds amount to £715m or 239p a share, which means that the shares currently trade at 40 per cent below their underlying asset value, most of which is underpinned by bricks and mortar.