Let Thornburg's Demise Be a Lesson to You 16 comments
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Let Thornburg Mortgage (TMA) be a lesson to anyone involved with leveraged financials. Thornburg Mortgage, as its name implies, is a mortgage lender. Because it’s an independent entity, rather than a subsidiary of a larger financial conglomerate, Thornburg has to borrow massive amounts of money from banks. It then uses this money to generate mortgages to would-be homeowners. Now, the banks charge Thornburg interest on the money it borrows. So to make a profit, Thornburg has to charge its homeowners another, higher rate of interest on their mortgages. Thornburg then pockets the difference.
This sounds complicated, so just think of Thornburg as a giant multi-billion dollar middleman between the banks and the homeowners. Granted, it was a middleman with very high lending standards… but a middleman nonetheless. About those standards…Thornburg only granted mortgages to the best borrowers out there. The typical Thornburg homeowner had a credit score of 740 or higher. And they usually put down 20% to 30% as a down payment on their mortgages. These were super prime, AAA mortgages. Because of this, Thornburg’s homeowners kept paying their mortgages while their neighbors went into foreclosure. As of January 2008, Thornburg had 38,000 mortgages outstanding. Only 78 of them were 60 days behind on their payments. That’s pretty incredible considering the carnage in the overall housing market.
And yet, none of this meant diddily when the credit crisis hit. As liquidity dried up and home prices dropped, the banks started worrying that Thornburg’s homeowners might not be able to keep paying their mortgages. Rather than waiting to find out, the banks panicked and told Thornburg to cough up more money as collateral.
Remember, Thornburg didn’t have much money of its own. So it had to sell its mortgage loans. And because it sold them quickly, it sold them at a discount to their true value. This happened first in July 2007 and again in March 2008. Both times Thornburg shareholders took it on the chin. This latest round saw Thornburg shares fall from $9 per share to 70 cents in less than a week. Anyone owning this company saw 90% of their capital disappear almost overnight.
Among the losers was Texas billionaire Richard Rainwater, whose $100 million stake lost 70% of its value in a matter of days. Rainwater now calls it his “single worst investment.” Bill Miller, the famed mutual fund manager at Legg Mason, also got slammed: Miller bought at $18 per share and added to his position at $9. He’s since lost 80% of his money.
Last but not least was founder and CEO of the company, Garrett Thornburg. During 2007, Garrett Thornburg bought more than $26 million worth of his company’s stock. Every time Thornburg shares fell he added to his position. He started at $23 per share and bought all the way down to $9. Today, Thornburg shares are trading for a dollar and change.
Folks, when the guy who founded a company loses his shirt buying shares, you and I don’t have a chance. Garrett Thornburg may prove to be a genius three years from now, but Thornburg shares would have to rally nearly 1,000% for him to be even close to break even. It’s very likely he won’t see most of that $20 million ever again.
Thornburg is a warning to anyone involved in leveraged financials. The credit crisis doesn’t care if you’re a billionaire, an investing legend, or a corporate insider. When the de-leveraging comes, your money can disappear in an instant. And the de-leveraging in the financial sector today is far from over. But that doesn’t mean there aren’t plenty of great opportunities out there. In fact, certain sectors perform terrifically during times of high market volatility. I’ll detail them on these pages in the coming week.
Disclosure: none
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This article has 16 comments:
Looks like a choice between crashing nose first or bouncing on the fuselage once. Either way, no one will get out without injury.
Taking Stock
New York, New York
April 4, 2008
MARGARET POPPER, ANCHOR: Thornburg Mortgage averted bankruptcy this week by raising more than a billion dollars; but it came at a big cost to existing shareholders. You’ll hear from Thornburg’s CEO, Larry Goldstone. Plus, an analyst on how you can profit from the deal.
Well, Thornburg Mortgage averted bankruptcy this week by getting one-point-three billion dollars in financing, but it was not cheap. Thornburg gave the new investors a nearly ninety-five-percent stake. On top of that, it’s going to pay an initial yield of eighteen percent. Joining us now is Thornburg’s CEO, Larry Goldstone.
Larry, welcome. I want to ask you—this is a very complicated deal and there’s one piece of it that seems to kind of hang out there as a bit unusual; and this is the senior subordinated note, which is a secured note. Seems like that wouldn’t normally be subordinated. Can you explain
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how that works and how this cash flow feature that seems to go to pay that off first fits into the capital structure here?
LARRY A. GOLDSTONE: Well, it is a senior subordinated security, and secured; but it does rank junior to our existing senior notes. And, so, it is not senior to our existing senior debt obligation. Both of those…
POPPER: But the cash flow, the cash flow picture…
GOLDSTONE: …both of those obligations are now secured. So, what investors may not realize is that the senior notes, in addition to the senior subordinated notes, are now the beneficiary of a secured interest as opposed to being unsecured senior notes previously.
POPPER: And what are they secured by? What are the assets?
GOLDSTONE: They are secured by the interest cash flows that come off of the company’s mortgage portfolio going forward.
POPPER: So, this is the entire…?
GOLDSTONE: So, that is the security interest that they have.
POPPER: …mortgage percent portfolio? The entire mortgage portfolio?
GOLDSTONE: Yeah, it’s correct.
POPPER: Okay.
GOLDSTONE: That is correct.
POPPER: And these are high-quality, jumbo mortgages.
GOLDSTONE: These are triple-A rated—for the most part—triple-A-rated mortgage securities backed by jumbo mortgages, yes.
POPPER: Okay, does the news that we just had about MBIA losing its credit rating—being downgraded by Fitch—does that affect the quality of any of these?
GOLDSTONE: It does not. None of our mortgage securities portfolio are guaranteed or have a credit rating that’s based upon any of the monoline insurance companies.
POPPER: Okay, so, one of the things I want to understand here: you—obviously, you’ve got to keep functioning. You’ve raised enough money to stave off bankruptcy for now. But you were making some very optimistic comments to Bloomberg about the jumbo mortgage market, and I’m wondering, are you actually seeing business? I talked to Kevin Stark, who’s an investor in distressed assets, and he said when you called, or when you call the line for Thornburg, you get a quote on those mortgages that’s much higher than the competition right now, because your cost of capital is so high.
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GOLDSTONE: Well, we have had to curtail the majority of our loan origination activities over the last four to six weeks. But now that we have recapitalized the company, now that we have got an agreement in place with our lenders, such that we are not going to be subject to, uh, margin calls on our reverse repurchase agreement debt, we are now going to be able to restart our loan origination and loan funding network. And, at some point, as we clear out our back log…
POPPER: But do you actually have the cash to do that? Do you actually have the cash to make loans?
GOLDSTONE: We do.
POPPER: How much?
GOLDSTONE: We have commitments for warehouse financing agreements of up to seven hundred million dollars. We have a hundred and fifty million dollars in working capital; and we have a liquidity facility of another three hundred and fifty million dollars.
POPPER: So, Larry…
GOLDSTONE: So, all told, we think we can easily support a five-hundred to seven-hundred-and-fift... mortgage pipeline going forward.
POPPER: And how long do you have to hold on before you start to get business back to normal?
GOLDSTONE: Well, in August and in September of last year, it took us three or four months to restart our origination business and begin to see some very, very positive momentum. But, by the time we got into the December and January timeframe, our business was actually reaching levels that were exceeding what they were prior to August of 2007. My sense is it’s going to probably take us a couple of more months. We have to rebuild confidence again; we have to rebuild our franchise and our relationships again. But I am highly confident we’re going to be able to do that, because, truthfully we are one of the few jumbo and super jumbo mortgage lenders left in the business today.
POPPER: But how long does it take for your financing costs to come down to a level where you can actually be profitable doing this? I mean, if you’re quoting nine-and-a-quarter interest rate for jumbo mortgages, and somebody can call Chase and get, you know, six or seven, why would they go to you?
GOLDSTONE: Our funding cost is not based upon the nine-and-a-quarter percent. Our funding cost is based upon the securitization execution we can get in the marketplace; and that’s somewhere in the neighborhood of six percent, give or take a little bit in today’s environment. And, so, consequently, as we clear out our loan pipeline, you’ll begin to see our mortgage rates come back down as we begin to encourage business as opposed to what we’ve been doing over the last month, which has been to discourage business.
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POPPER: Okay, and in terms of the marketplace, what is your sense of the appetite out there? We are going into a recession. This seems like an un-advantageous time to be lending big loans for big houses.
GOLDSTONE: Well, actually, the markets that we lend in and the clientele that we lend in continues to be a fairly stable segment of the market. Our average loan size is a million dollars; our average home value is a million and a half to two million dollars. We tend to lend in the major metropolitan areas – Manhattan, Greenwich, Connecticut, San Francisco, coastal areas along California – and those markets continue to do very, very well.
POPPER: Now, our most…
GOLDSTONE: A segment of the mortgage market that’s not doing so well is, really, the three-hundred-thousand... and lower home segment of the market.
POPPER: Now, in that category, are most of the homes that you’re lending for – are they primary residences or a bunch of these secondary residences for very wealthy people? And those people have been hit by the stock market. Might they sell some of these properties?
GOLDSTONE: Well, they might. The majority of our loans, though, are for single-family, owner-occupied, primary residences. That would constitute somewhere between—around seventy-five percent of the loans that we do. For the Baby Boomer Generation and for the retiring generation who also want a second home or a vacation home we do facilitate mortgage loans for those folks as well.
And, truthfully, the stock market is not down all that much. I mean, it’s down, maybe, ten percent from its peak. So, the stock market has not been doing that poorly in diversified portfolios.
POPPER: All right. I want to get back to this deal again – I threw a bunch of questions, yeah, at you [laughs] when we came out of the box here just ‘cause it’s so complicated, I’m so interested in it. Explain to me this primacy of cash flow feature that goes with…
GOLDSTONE: Well, let me break this into three component parts, because the security that we issued in this transaction really has three component parts. There is a secured note. It bears an interest rate of eighteen percent today. But, upon successful tender of our preferred stock and successful vote to authorize an increase in the number of shares that the company can issue, the interest rate on that note will drop to twelve percent.
The second component is warrants. All of the investors who bought the secured notes also get warrants to buy common stock at one penny a share.
The third component is a component that only becomes effective if, in fact, we do not successfully tender for the preferred stock, and we do not successfully increase the authorized number of shares. That’s called a Principal Participation Agreement; and that Principal Participation Agreement comes into effect a year from today, when our loan—or, or our override agreement, which is the agreement with our lenders, expires. And that allows the secured
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subordinate note holders and the senior note holders to participate and capture the principal payments on our mortgage portfolio. So, those are the three component parts.
POPPER: Okay, so, in essence, are you structuring that debt in a way that forces the current shareholders to tender? Because, obviously, they are being diluted down to about five percent of the company at this point; so they need, potentially, a little nudge to get them to take this deal.
GOLDSTONE: Right. Well, what we need from the common shareholders is for them to vote to increase the authorized number of shares. We are not tendering for common stock. What we need from the preferred stockholders is for them to tender their preferred shares. And, yes, there is a nudge in place to incentivize them to want to tender their shares and to become common equity holders. Because, ultimately, we think that’s where the upside potential is going to be, anyway.
POPPER: And is your sense that you’re going to get enough shareholders to authorize this and that you’re actually going to be successful in this financing?
GOLDSTONE: Well, we certainly hope so; and we certainly think that the incentives are in the right place for everyone in the capital structure today to cooperate as we move forward. If everybody cooperates, we think that there is significant upside for those investors, based upon where we are today, and certainly better than where we would have been had we not raised this new capital.
If they don’t cooperate and participate and if they don’t authorize and tender what we need to have done, then, in fact, the returns that they’re going to be able to experience are going to be greatly diminished over time.
POPPER: Well, Larry Goldstone, thank you so much for coming to us and describing this very complicated and very fortuitous deal. Larry Goldstone, CEO of Thornburg Mortgage.
Last august they had margin calls, did they ease up on the leverage?
NO.
Result, in March they got MORE MARGIN CALLS,
this last round destroyed the common stock.
Now they get more money and he says they are
going to write even more mortgages!!!
KEEP THAT LEVERAGE UP LARRY,
you'll bankrupt the company sooner rather than later.
By David Mildenberg
www.bloomberg.com/apps...
The new investors include MatlinPatterson Global Opportunities Partners III L.P. and Richard Rainwater, former chairman of Crescent Real Estate Equities Co., according to regulatory filings. Rights permitting new investors to demand changes in operations and replace directors won't preclude his work, said Goldstone, who declined to name other parties who committed capital.
Greater Risks
``Their incentive and their motivation is to try to allow the company to return to some sort of normalcy,'' he said. ``They are looking for much greater than market-based returns because they are taking much greater than market-based risks.''
Five of Thornburg's 10 directors will be replaced with nominees designated by ``certain investors,'' the company said on April 1. It's not clear when those changes will be made, Goldstone said.
To contact the reporter on this story: David Mildenberg in Charlotte, North Carolina at dmildenberg@bloomberg....
They need to keep originating to make profits.
They do this with a warehouse line, sort of (ultra simple explanation) like the way you can use your home equity line. They originate as many as possible in a month and then repackage them and sell them to an investor for a profit, cash-in-hand. This then clears their line to do all over again.
The loans they sell are good jumbo loans to strong borrowers who would not likely default because they are higher net worth clients.
This is a very simple explanation for how it works. I'm leaving a lot out because the point is they need to originate loans so they may repackage and sell them to investors such as pension funds etc. This is what they do every month to make a profit.
They are not a middleman. LOL They even service the loans they choose. In addition they have a niche market and customer profile that not many other lenders have or can compete with.
GOLDSTONE: Our funding cost is not based upon the nine-and-a-quarter percent. Our funding cost is based upon the securitization execution we can get in the marketplace; and that’s somewhere in the neighborhood of six percent, give or take a little bit in today’s environment. And, so, consequently, as we clear out our loan pipeline, you’ll begin to see our mortgage rates come back down as we begin to encourage business as opposed to what we’ve been doing over the last month, which has been to discourage business.
Disclosure: Mortgage Broker, Long TMA
The posting of the interview with Larry Goldstone was also appreciated.
It would have been of great interest to most of the small holders of common stock to have Mr. Goldstone explain under what circumstances, and within what time frame, the recent deal is of benefit to present owners of common stock.
TMA did about $350M in origination in 4th quarter 2007 at a nice profit. Business grew to $300M in January and another $300M in February. If not for the margin calls/etc, they were on pace to grow new origination volume to around $6B this year. The overall mortgage industry is slowing, but TMA's market share is very small and they've barely tapped into the wholesale mortgage broker market.
All of these new originations move from warehouse line to CMO without the need for repo agreements or other things subject to margin calls. If only they could have shed the Alt-A loans back in August or before the meltdown...
If the irrational stock price increase occurs, the massive short-covering would accelerate it, pushing TMA prices up, and make things even more "irrational" -- except that the price will really have been going up and will thereby have rendered the irrational highly rational, retroactively. Such is "reflexivity" in securities prices (George Soros' theory).
In his interview, Goldstone makes it clear that there are basically two options at this juncture:
>FIRST OPTION: “If everybody cooperates,……. THERE IS SIGNIFICANT UPSIDE FOR INVESTORS, based upon where TMA is today, and certainly better than where TMA would have been had the company not raised the new capital.”
>SECOND OPTION: “If they DON’T cooperate and participate and if they DON’T authorize and tender what TMA needs to have done, then, in fact, THE RETURNS THAT THEY’RE GOING TO BE ABLE TO EXPERIENCE ARE GOING TO BE GREATLY DIMINSHED OVER TIME."
The means to TMA’s survival appears to be quite plain and simple so why not go along with it? If you are one of the common shareholders who does not approve the vote to increase the authorized number of shares OR if you are one of the preferred stockholders who does not wish to tender your preferred shares… then I ask WHY NOT? I would like to know WHAT IS THE ALTERNATIVE? Some want to argue against the deal, yet they do not offer a feasible, attractive alternative. So what, specifically, does the opposition propose? I would like to hear of any decent, viable alternative proposal that TMA management might opt for.
All the accounting figures/calculations being tossed around are indeed impressive yet mind-boggling. How reliable is this data? Who knows? I am more inclined to go with what I know for a fact, and in this case the management of Thornburg Mortgage says it needs the cooperation and participation of the shareholders in order to recover and continue its operations. Why on earth would any competent shareholder invested in TMA choose not to support the company in which he/she has invested, especially when the only OTHER apparent choice is merely a chance of slim to none?
EMAIL: ir@thornburgmortgage.c...
PHONE: 888-898-8698
I have been attempting to obtain accurate, current investor information from your web site, and I have been unable to achieve satisfactory results. Your investor relations portion of your web site seems to be lacking in the type of info that shareholders need, in particularly now and due to the current dire financial straits Thornburg Mortgage has fallen victim to. For instance, your Calendar of Events link only provides data for the year 2006. I can not determine when your next quarterly report will be issued nor when your next shareholder meeting will be held so that I might gain more reliable info. It is frustrating to say the least, especially when I currently own shares of your rapidly diluting common stock. I tried calling your company office, and I my call was forwarded to someone named Bryan/Brian… I left a voicemail, but my call was never returned. Your company does not give the appearance of caring or catering to the needs of the old loyal shareholders. Many small investors I have spoken with are hurt and angry by this fact. It is for this reason alone that I would seriously consider selling my shares of TMA if I were not at risk of loosing a sizable fortune. Therefore, I must ask, do you folks care at all about your old shareholders? The talk on the street is that TMA management cares only about themselves and that you are selling your old shareholders out. I do not want to believe this rumor, but it is hard to dispute at this juncture. Rather, I want to trust and believe in the company of Thornburg Mortgage as I am now left holding only a meager portion of it chiefly in light of the impending dilution. Any suggestions for a very concerned shareholder would be appreciated. AND please do not resort to your standard form-letter response... I believe I deserve better than that.