Haven't We Heard this Market Song Before? 24 comments
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Two weeks ago, the world was shocked to learn that an illiquid inventory of mortgage-backed securities at Bear Stearns (BSC) had brought the once great investment firm to its knees. Within days, JP Morgan (JPM) had bought the company for the ridiculous price of two dollars per share. The rationale was that BSC would have gone bankrupt if they hadn't agreed to the deal, and so it was a foregone conclusion that the two dollar number was written in stone, however incredible - or however unfair to the shareholders - it might have seemed. The deal was subject to the approval of the Bear Stearns shareholders, but what choice did they have? It was take two dollars or get nothing in a bankruptcy, right?
Wrong. The stock started trading up. Commentators marveled at the irrationality of the stock's move. "Didn't they understand that the stock was only worth two dollars", they warned. Then one week later, the story suddenly changes. Now JPM has changed its mind and will pay ten dollars per share: Not two. Those dummies who bought the stock at two ended up with five baggers (minimum). AND, we haven't heard the last of that whole story yet, neither.
Here we sit with shares to a GREAT company with a GREAT inventory of jumbo mortgages - many of which are AAA rated, and because of a temporary disruption in investor confidence in mortgages that - according to yesterday's market surge - has already begun to subside, and we're told to lay down and accept the fact that a deal has cut the value of our shares to a buck, and that the stock can't rise from here.
Sorry, I'm not a believer.
BSC traded at nearly fifteen dollars last week. I'm betting on at least five to seven here within a week or two. Eighteen percent prices the risk in today's market. What will the risk premium be in May or June when the shareholder vote deadline arrives? Twelve? Eight? So Thornburg Mortgage (TMA) will have to pay back the 1.3B to the present investors (don't think that JPM didn't have signatures at two dollars). When rationality returns to the mortgage market, there could be a long line of buyers who'd be happy to buy TMA's converts at a much better level than this deal.
Disclosure: Author has a long position in TMA
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This article has 24 comments:
Jon
Jon
Sorry for the last paragraph - you're right that it could have been clearer. The original converts that were offered last week at twelve (percent...coupon to the bondholders?) didn't sell. Bet they would have in a different mortgage market than this one that's being driven by fear rather than rationality. In fact, I'll bet that eights would have sold in normal times.
As for the dilution math? What was the math on the BSC deal that priced the stock at $2.00? It was pretty simple, wasn't it? Today BSC is trading at (over) $10.00. How useful was the original math there?
I admit that TMA may still be worth a dollar six months from now. Let's watch and see, though.
Bloomberg flashed the factory orders ONCE, for 5 seconds, during Bernanke-bullcrap, not long enough to read.
So the choices are to vote for the share increase, in which case the shares are worth the diluted amount (around $1 by my very rough estimates) or vote against and have the company declare bankruptcy - in which case you'll get zilch.
In bankruptcy you'll get nothing because of the clever way the docs have been structured. TMA has an unrealized loss of around $1.5 billion on its repo position (hence the current book value of 8 cents per share, pro forma).
The hope is that the repo position recovers in the coming year - in which case the diluted common will have a book value of around $0.55 (by my rough calcs). But if you don't vote for the new shares, the deal has all the repo recovery going to the new bond investors - and hence you're right back to 8 cents (at best) - before the costs of bankruptcy.
Bear was in a similar postion. The market value of their $30 billion mortgage book collapsed, and on a mark-to-market basis their book value of $80 rapidly approached zero. Had the Fed not stepped in, they would have declared bankruptcy. The Fed bought the book at a knock-down price (hence Ben's comments today that they might make money on the deal). While it hasn't been disclosed, I suspect that post this transaction Bear's book value wasn't far off the $10 price. Another reason for bumping it from $2.
Had the Fed (or somebody else) stepped in and bought TMA's mortgage book at a similar price, the company would have been bankrupt and the common would have been worth zero. And the new buyer would have received the potential upside of the prices returning to reality.
The way this deal is structured, you've got a shot at some of the upside, as long as you play ball and vote for the share increase. Hence the shot at a book value of $0.55, with more profits to come after that. So it's not a great deal relative to where the stock used to trade, but it's actually a pretty good alternative to bankruptcy.
As for Cayne's $61 million (and much though I dislike the guy based on what I've read), keep in mind that it was less the 10% of what his shares were worth at their peak last year (6%, actually).
TMA's peak last year was $24. 6% of TMA's peak price of $24 is $1.44 - which is about where we are now on TMA and surprisingly close to the discount Cayne got.
Whether he should have ever been paid the shares in the first place is a different discussion...
when he said his portfolio consisted of solid loans...alt a loans are not worth a damn in todays market and he got marked to book at my expense. I would have bailed out at 10.00 rather than the 1.18 I finally got because of this blatent
lie.thhis dea favors the creditors only..us shareholders got screwed.
A purchase of the company under the guise of a 12% loan
and yes new sec filings shows rainwater got in on this deal too
I believe the only people who are gonna make out are those holding the new bonds and warrants
But don't sell TMA yet either if anything start accumulating at these prices.....
dont you think smart money(as matlin clearly shows he is) wouldn't enter into this deal unless they could guarantee a yes vote.
As of the 11th they will control a 40% voting block... If they haven't already secured a yes from a large couple of holders It would only cost the bondholders bet. 30-60 mil in open market purchases to gain that last block and ensure a yes vote
I believe this vote is a mere formality and it doesn't matter if you vote no. They already have the vote locked up.
look at how the options are pricing this stock
you can get synthetically long this stock for .60c by selling june 2.5 put (2.0) and buying june 2.5 (.10) call
that price is much closer to tma's true value post dilution
unless tma falls below .60 you profit
the only reason dilution hasn't been priced into TMA yet seems to be that either bondholders are buying some shares as insurance for a yes vote or massive short-covering, which I doubt.
This is a terrible deal
To anyone considering getting long TMA
Im not going to say dont do it, just that I wouldn't do it nor do I suggest it...
but if you are dead set on it do it via the options as I suggested...
why pay 1.28 for something when you can do it via options for .60
If you vote "no", the company files for bankruptcy and - the way the deal docs are written - the new investors walk away with the whole company and common holders get nothing.
If you vote "yes", you get a small slice of the new company.
This was basically a bankruptcy - but much faster, without all the messy paperwork and legal fees, and with a net result that gets the shareholder more than they otherwise would have had.
Don't blame the new investors - they just took advantage of the situation (I'm not one of them, unfortunately). Instead blame the "brilliant" management that tried to finance a long-term obligation (the mortgages) with short-term funding (the repo) and got caught with their shorts down.
So the only reason to vote "no" here is because you're mad (justifiably, in my view) and you're willing to forgoe that last $1.20 per share to express your frustration.
seekingalpha.com/artic...
BSC: ARE you kidding on increasing valuation from here!!!
--JPM has already started absorbing the BSC mgmt team and letting go some employees. BTW, the BSC people that JPM is hiring get more JPM stocks to cover for the loss in value of their BSC stocks (not to mention a job when Wall Street is chopping everywhere).
-- Who do you think bought Jimmy Cayne's shares??? JPM owns over 42% of the outstanding stocks now. In the case of any future litigation, you don't need to hold the stock to qualify because the event has already happened.
-- Most of BSC's institutional clients, namely the hedge funds, have left. It's sad in a way.....BSC's coveted hedge fund clients turning against their own primary broker by pulling their money while shorting BSC's stock. May not be collusion, but definitely a lesson for other investment banks.
As for the argument about BSC's book value, my analogy is this:
A guy who makes $100,000/yr buys a $2,000,000 with $20,000 down payment (alarms bell should be ringing). The house is fantastic and in a great neighborhood. The guy loses his job, and misses payment on his house for a few months. The house may still be worth $2,000,000, but how much of it belongs to the guy? The answer is less than zero, because even if he sells his house for $2,000,000, he doesn't have enough equity to pay for the selling costs. His best option is to take the $1,000 cash from the mortgage holder and vacate the home without trashing it.
The cruel joke here is the eery similarity between Wall Street and Main Street with regard of debt leverage.....one of the basic lessons in Econ 101.