Thornburg Mortgage Must Sell Its Soul to Stay Afloat

According to the WSJ, Thornburg Mortgage (TMA) has reached an agreement with 5 of its lenders to freeze margin calls at this time. From what I read the price is very high:

• The 5 lenders will receive warrants for up to 27% of the outstanding common stock at 1¢ per share.
  
• The dividend will be suspended for the remainder of 2008. If profitable, the company can declare a dividend in December to be paid in January 2009.
  
• The repo parties will keep 100% of the principal repayments on the affected securities and 20% of the interest paid.
  
• TMA must still raise close to $1 billion in new capital in the next 7 days.

I hope the company can make this fly and keep itself going. Besides being a shareholder, I have a mortgage through Thornburg, and it has quality service. I guess time will tell if this move is enough to save the company.

Disclosure: I have a long position in TMA.

Comments

[Roland]

It's a huge price to pay, but the alternative, a chapter 11 filing, is probably worse for the common shareholders.

Recent events have really highlighted the flaw in the common REIT model of borrowing short and lending long. REIT's may have to adapt to a less leveraged business practice. It might even be wise for congress to do away with the favorable tax treatment of the current model to incentivize better business practices.

[chagrinned1]

We are going to end up with about a dozen major Banks in USA as they reneg on loans made for home equity and corp
securities. Many lenders either will go under or never recover from the lack of funding. Margin calls under the current circumstances should be on hold, except for egregious and flagrant borrowers. Thornburg is not one of the latter. Banks always win and dead bodies in the way will be brushed aside.

[sunyata]

What is the possibility that the current Fed offer to accept more CMO paper and hold auctions starting the 21st. can improve this situation? Is there any possibility of a new deal?

[sunyata]

Sorry, that's the 27th.

[User 74883]

I think that Thornburg will survive with the sharp decline in spread. It should be able to sell its mortgages to Fennie Mae and Freddie. They are now able to buy additional $200 billion mortgages.

[sunyata]

Does anyone know if a future reverse stock split would violate any terms of this deal, or a buyback?

[Andrew]

I don't believe reverse stock splits or buybacks will increase the value to the common stock any time soon.

TMA's earnings available to common share holders will be limited for years (if at all) because:
- They have to pay 12% for the $1B, which will eat into the mortgages they are buying/generating.
- They will no longer be able to leverage 20x in the post credit bubble world, which again eats into the future growth potential of mortgage reits.

The only way I see current shareholders make out is if the value of current assets increase in value. With the housing market still going down, i don't see this happening for at least a year.

full disclosure: I am long tma preferred.

[sunyata]

I agree with you in terms of earnings and value, but if the share price drops below $1.00 this is all a irrelevant, they will be de-listed.

[.crazylegs..]

sell your common and buy these new notes if you are interested in still investing in TMA at all. you get detachable warrants for free with the initial purchase of the notes AND they are convertible to equity if they survive. you also (theoretically) get the 12% interest payments (or a potential 25% interest rate if the company cannot get shareholder approval of the increase in authorized shares out)

the conversion of these notes would dilute the current common equity by 500%. ouch. this is known as a cramdown. they cram equity down your throat for free but the company survives.

the only problem though is that these notes are subordinated to significant senior debt so depending on the ultimate asset quality and haircuts etc on repos, you could be made whole on these notes if there are any assets left in a bankruptcy scenario.

if their asset quality holds up (avg annual income of borrower is $400k, avg ltv of 65%, FICO 740ish AND most importantly .55% delinquency rate) and they can satisfy the many requirements, then this could be an interesting gamble.

so if you must, buy the notes and you might get lucky.

[User 166503]

Ok how do I buy these notes? What are they called?

[Andrew]

if anyone is interested in new investments in TMA, then they should look at NLY.....much less distressed.

TMA i believe will survive as an entity, but investing in it is kind of like living along the Gulf Coast.....don't live in the basement apartment.

Sunyata, I see your point now.

[Ames Tiedeman]

This is about the worst dilution one can imagine.

[Andrew]

If one is really believe TMA as a going concern and good operator, then you may want to take a look at their callable sr. debt, which is $.39 on the dollar with 8% yield.

The question: is TMA a sinking ship even with new capital?