Don't Throw Thornburg Mortgage into the Briarpatch Yet

It is clear by the continuing margin calls being experienced at Thornburg Mortgage (TMA) that the attractive dividend will be announced as suspended in the next few days. The company cannot be offering such a dividend as it scrambles to shore up its capital to meet the relentless calls.

However, for those investors that have some DNA of the "vulture" in them, a bet that the company's well-respected backoffice and position in the mortgage industry will attract the necessary capital to clear the current margin call hurdle may not be ill-advised. Not to be overlooked is that Legg Mason Capital Management disclosed a 9.08% ownership in Thornburg (as of January) along with real estate and energy investor Richard Rainwater of Bass Brothers fame reporting a 5.5% position. It would not be altogether surprising if either of these institutional holders have some participation in the raising of that capital.

Just like E-Trade Financial (ETFC) found a well-heeled investor in Citadel Investment of Chicago when they needed to protect their initial investment from last summer, so too will be the incentive to the current institutional holders of TMA.

Disclosure: none

Comments

[Jack Yetiv:]

I completely agree. But in addition to equity participation as mentioned in the article above, additional refinancing is quite likely as well. Note that at 3:21 PM yesterday (3-3-08), TMA did in fact announce a $1 billion refinance. Although the press release was short, it sure sounded like TMA obtained more than enough cash to meet yesterday's margin call--and maybe one or two more of the same size.

Everyone should note that TMA Chairman Mr. Thornburg bought 1 million shares of TMA a couple of months back at around $10/share. Other insiders also own a substantial amount of TMA stock. They will do everything in their power to make sure TMA survives.

Finally, and most importantly, unlike the subprime lenders who have gone out of business, TMA's underlying business is a very good one, with prime and superprime borrowers and a default rate of under 0.5%.

I think that at under $4, TMA offers a wonderful risk-reward opportunity.

Jack Yetiv

2008 Mar 04 09:51 AM

[Pj568:]

Doesn't seem like the time to betting on mortgage co's. Some think there is a lot of quality here while others make mention of their large holdings in CA and FL and that much of their Alt A is stated income. The stock at 4.00 (approx 25% of the year end book value) indicates that when the financial statements catch up with the market value we'll see losses over 1 Billion. And who really knows what the liquidity situation is. TMA could be out of business at any time.

Total leverage runs around 18. Analysts/writers also talk about picking up additional capital as if there is no cost associated with it. You bet, just ask Citi, Mbia and Etfc how much their capital cost. High rates on debt and high rates on convertible bonds tells you a lot about what the true fear factor is. The stock value of these companies is either the same or lower now than what it was when they picked up their additional capital.

Actually I'd like this company to be a survivor but there is no way I'd put any money on it.

2008 Mar 04 02:15 PM