What Should Thornburg Mortgage Shareholders Do?

Every time it looks like Thornburg Mortgage (TMA) is back on track to profitability, it gets whacked by more bad news. Last week they announced they had to cough up $300 million to meet margin requirements. As of yesterday they are on the hook for another $270 million. They do not have the cash!

The margin calls come as the mortgage securities are marked-to-market and prices are falling. Although TMA plans to hold the securities until repaid, they must still meet margin requirements. Since Thornburg does not have a default problem with their portfolio, it seems someone is putting the squeeze on them, or just rampant fear rules the mortgage security market, no matter what the quality.

If Thornburg can survive this round, I assume the security prices will recover at some time and the company will get the cash. Also, today the company announced they had successfully securitized $1 billion in high quality hybid ARMs. How does that work out?

A week ago the stock was $12+, now $4. A month ago, CEO Larry Goldstone was very high on the company’s prospects. Now many in the financial press are predicting bankruptcy. I have had a lot of faith in the management of TMA, but this time I am not sure they can fight the entire mortgage market meltdown. I will be hanging on to my long positions in TMA but can really understand those who have or are tempted to bail out.

Official press release here. Read it and make your own decision on what is between the lines.

Disclosure: Long TMA.

Comments

[Bruce909]

Thornburg is building a palace of an office building in Santa Fe. They can not afford it- now. It is difficult to believe they will be able to able to convert their construction loan to a permanent loan.

[esteedman]

Mar 04 09:07 AM

Buying on this dip? I keep thinking that maybe THE HERD is really correct and the uncertainties in the corresponding securitized debt markets is just too unpredictable at the moment to play, but then again, perhaps what happened yesterday is just one of those things that happens when there is volatility, panic, and confusion.

BUT, after TMA FINANCED (NOT SOLD) that $1B yesterday in record time, I’m convinced that they will survive and ultimately prosper. If one must pick financial investments in this market, the only truly valuable capital is management, which in this case is extraordinary. We’re investing a lot on the fundamentals of the TMA business model and the strengths of the straight shooter CEO, Larry Goldstone, and his observably superior team to successfully navigate through this perplexing mess.

These guys aren’t likely to bankrupt and there is clearly BIG money betting on that (Bill Miller @ Legg Mason is historically a genius stock picker and he obviously likes the play.) A quality firm with very high performing AAA mortgage assets, if not the best, will persevere through the dysfunctional aspects this convoluted market presents.

If a Thornburg with its GREAT & PERFORMING PORTFOLIO can’t make it, who can or will?

Ed Steedman
Swift Island Capital Partners

[Jack Yetiv]

Tim, there are no guarantees in life--and especially not in the stock market these days--but I think the answer to your question is "They should hold onto their stock today."

Remember that TMA Chairman, Mr. Thornburg, bought 1 million shares of TMA about two months ago at about $10/sh. He is in this boat with all of us (I am long 30,000 shares bought yesterday).

Also, keep in mind what the best investors always says (think Buffet here): BUY good businesses. The rest will sort itself out in time.

TMA is a good business. It has never done a subprime loan in its life. Most of its borrowers are high-credit-score prime and superprime borrowers. The default rate on its mortgages is less than 0.5%. It made 33 cents per share in the quarter reported about a month ago.

Although being a good business is not a guarantee, it sure makes a big difference. As proof of the quality of its business is the $1 billion refinancing it did yesterday. Here are parts of that press release:
====
This transaction was accounted for as a financing and not as a sale and the proceeds were used to reduce the company's borrowings under its ARM loan warehouse financing lines by approximately $920 million.

. . .

In summary, this transaction enhances Thornburg Mortgage's liquidity position and provides long term financing for the company's originated mortgage loans.
=======

This tells me a few things:

1) In yesterday's horrible market, TMA was able to go out and get someone to lend it $1 billion WITHOUT having to give up any equity in the company. Do you think that someone did not do some serious due diligence before lending that money?

2) Although the press release is not crystal clear on the point, it sure seems to me like the billion dollars CLEARED yesterday's $270-million margin call--and then some--again, without having to give up equity in the company.

3) This does not appear to be a stop-gap measure. The release indicated that this provides "long-term" financing for the company's originated mortgage loans.

4) This also suggests to me that if TMA was able to go out and get a billion yesterday in a rather nasty market, without giving up equity in the company, it will be able to do so again, given more time. I expect another positive announcement from TMA this week, and I would not be shocked to see TMA at over $5 by the end of this week, if not sooner.

Jack Yetiv

[SeekingClarity]

Mr. Steedman,

I'm curious about your statement regarding "...the straight shooter CEO, Larry Goldstone, and his observably superior team...". I often hear investors and analysts talk about 'quality management' playing a large role in their decision process but it's never clear what these management assesments are actually based on. I would be interested in some of the facts behind your opinion.

I'm not an expert and I don't have a strong view on Thornburg's management one way or another. However, I find myself questioning their wisdom in not liquidating their Alt-A assets back in August as it became clear that investors were beginning to shun any asset that had even the appearance of potential credit problems. It also seems to be a bit cavalier to be using newly-raised 'life raft' capital to buy new assets while the structured finance markets are still in a state of turmoil.

In cases where so much book and market value are wiped out in such a short amount of time, conventional thinking might lead one to question management's ability. That certainly seems to have occurred around many of the other financial institutions that have experienced large losses. The street is now littered with senior executives who have been forced out following big writeoffs and subsequent share price drops. But Goldstone actually got promoted following the past summer's debacle. How does that work?

I must say I'm becoming increasingly concerned with the trend in thinking that often heaps praise (and obscene wealth) on executives as the stock price goes up but somehow sees fit to claim 'it wasn't their fault' when things go bad (see today's WSJ article on the bonus plan restructuring at WAMU). In many cases it wasn't their 'fault' when things went well either but they still got paid like it was. Maybe they should have to accept the blame and pay the price when things go bad as well.