Is Thornburg Mortgage Common Really Worth $3.88B? 33 comments
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Thornburg Mortgage (TMA) announced on March 31 completion of a new debt offering for $1.35 billion, which includes warrants to buy some 2.75 billion new common shares at 0.01/share; 47 million additional warrants issued to repo lenders and some 155 million more warrants to be issued to preferred shareholders, all with 0.01 exercise price. The bulk of the new warrants are tied to shareholder approval of an increase in total shares and buy back of the preferred at $5/ share. If either of these do not occur, debt interest rate stays at 18% and the debt holders get the benefit of a 7 year participation agreement that is structured as a strangle hold and essentially guarantees that any remaining capital will be paid to the debt holders and the company will be bankrupt.
So old common shareholders, assuming approval and preferred buy back, will own 5.5% of the new fully diluted shares. Current shares are 171 million; total outstanding after these transactions equals 3.109 billion
- TMA closing price 4-8-08 = $1.39
- Market cap with dilution = $4.32 billion
- Market cap at $1.25/share= $3.88 billion
There is a huge disconnect between what TMA is currently trading for and what is justified given the huge dilution that is coming, or the alternative that will lead to bankruptcy. Why is the stock still trading at these price levels and how long will this continue?
Possible reasons are:
- Short squeeze - TMA is on the SHO threshold list for fail to delivers meaning it is virtually impossible to legally short the stock now and could mean short sellers are being forced to cover.
- Institutional investors are asleep at the wheel. Stock has averted bankruptcy for now and institutions are holding or buying in the uninformed belief that the stock may recover from the current level.
- Mom and pops are holding or buying for the same reasons as the institutions.
- Investors are holding or buying in the belief that the full dilution will not occur or there will be some legal challenge that will stop the massive dilution.
A close reading of the facts does not support any of these reasons other than possibly number 1 as a reason to hold or buy the stock, and that reason will be very short lived. TMA's own sales materials for the debt offering (available here or on TMA's website as "see 1st 8-K filed 4-2-08- Information Provided to Investors in Private Placement"; it's best to download the PDF so you can read all the small type) reflect that the current value of its common stock based on the market value of its mortgages at 3-24-08 and after giving effect to the $1 billion of preferred outstanding, if negative $3.42.
If all the intended transactions occur, that book value goes to about a positive $0.06.
If its mortgage recover in value back to their full face value, book for the common perhaps will get back to 0.60. Anybody who thinks the mortgages will recover to full face value anytime soon is delusional. While TMA's credit quality is good, it is still going down and there is simply way too much supply of mortgage securities out there with too many banks looking to reduce their positions and very few buyers.
But TMA still trades at a price that is 2 times what its asset value would be if its assets fully recovered in value. Not to mention the 12% interest rate it will have to pay on the new $1.35 billion in debt.
While there may be some franchise value to their business, that business has fundamentally changed and the franchise value could never justify anything more than a small multiple to book.
CEO Goldstone is again touting their prospects over the airwaves and I hope they survive and do well. But he knows there is no way the current stock price can be justified.
Is there a realistic chance of some legal challenge that averts the massive dilution ? very doubtful as TMA’s own numbers show the common is under water.
If shareholder approval is not obtained, the participation agreement gives debt holders all principal payments on the entire mortgage portfolio for 7 years. Company in its investor materials says this could be worth 2.2 billion as most mortgages will pay off in those 7 years, so TMA will be left with very little and will still owe the $1.35 billion.
The first bunch of new warrants, some 197 million will be issued and exercised April 11; those shares can't be sold until they are registered except in exempt transactions. Exempt transactions could include sales to short sellers. Also the new debt holders could short the public shares against the box of their unregistered new shares as the company is obligated to register all the new shares that just will not happen immediately.
Also the repo lenders will get 47 million new shares for their warrants.
Given that there are only 171 million shares out now, the initial dilution increases the share count to some 415 million, 2.4 times the number outstanding now.
Once they actually own the new shares on the 11th, I believe the owners of these new shares will figure out a way to quickly take advantage of the price abnormality in the current price of the common through shorting or sales to others who will short.
Even if it does not start on the 11th, given the total likely 2.9 billion new shares which the company must register, soon there will be way more sellers and the price will go to where it belongs.
Look at put option pricing for July and October; it implies a share price below 0.50 and further out implies even lower prices.
Anyone with any sense will sell now.
Disclosure: short through options, as most people cannot short this now.
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Everyone wants to put a negative comment on everything. It shows you are in tune with everyone else. I agree with Morgan Stanley. The end of the crisis. is about over. Invest now!!!!! Be a man and say the truth. We are on a up swing!
TMA does not deserve to survive, and its shareholders are complacent enough to believe that "Wall St" will bail it out on preferential terms. However, expecting a revised offer higher ( as per Bear Stearns ) is not realistic.
The TMA price, at present, is ridiculous, and as the market probably has not bottomed out yet, it could look even worse in the near future. It is time for the shareholders to take what they can, and move on. Wishful thinking cannot save the situation under current market conditions.
Why anybody would wish to chase "good money after bad" is unfathomable.
I can't believe these delusional longs. To think someone can apply TA to a stock that can be flushed at any moment by substantiative fundamental information is beyond me. Matters not a wit the quality
of their portfolio, they were a hedge fund (effectively) that leveraged excessively with hard to value collateral. The margin calls came, and they had to liquidate, and/or enter the current toxic agreements that screw the current shareholders.
I've played the massive swings we have seen over the last several months, and done rather well. But the fat lady has sung, all she needs to do is waddle down from the stage. Anyone sitting long in this thing has to have their heads examined.
98% of Northern Rock mortgages were classed as Prime, but it still failed, even with $20 Billion of deposits to fall back on.
TMA does not have this luxury, and is not large enough to warrant state intervention, therefore put it out of its misery, and move on.
TMA earned roughtly $280 million in 2005. This divided by 3.1 billion shares is roughly $0.09 per share. There may be upside to this number, as many of TMA's competitors are gone and spreads have widened. (yes, there is now the interest on the new debt, but if markets recover this is also capital that can be put to good use).
$0.09 times a P/E of 15 is $1.35. Not too far off the current share price. So shareholders are clearly being hugely optimistic (unjustifiably so in my opinion), but they may not be downright delusional...
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
----------------------...
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.
----------------------...
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.
Goldthief and company aren't interested in the shareholders,
they just want to keep their million dollar salaries and benefits.
By David Mildenberg
April 3 (Bloomberg) -- Thornburg Mortgage Inc., the mortgage company that averted bankruptcy this week, expects to rebound as a leading lender to borrowers of high-priced homes because of backing from its new investors.
``The opportunity to get a jumbo mortgage loan is fairly limited,'' Chief Executive Officer Larry Goldstone said in an interview today, referring to loans of more than $417,000. ``There is minimal to no competition.''
The collapse of mortgage markets left Santa Fe, New Mexico- based Thornburg needing almost $1 billion to meet lenders' margin calls and to avoid bankruptcy. While the company was saved in a $1.35 billion refinancing, the agreement gives the new investors as much as a 94.5 percent stake and an 18 percent initial yield on notes.
``If we were to attract capital, the terms needed to be highly protective of the investors' interests going forward,'' Goldstone said. ``A lot of money has been lost even by investors who thought they were getting in at the bottom in the last six months.''
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.''
Thornburg gained 1 cent to $1.30 at 4:15 p.m. in New York Stock Exchange composite trading. The lender has declined 95 percent in the past 12 months.
Thornburg specialized in jumbo loans, which were typically used to buy more expensive homes by people with strong credit. The company will focus particularly on ``super-jumbo'' loans, Goldstone said. Those loans usually are $650,000 or more.
The declining value of Thornburg's holdings triggered margin calls from lenders including Bear Stearns Cos., Citigroup Inc., and Credit Suisse Group. A margin call means a borrower must pledge additional collateral or cash against the outstanding loan.
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....
Fraley- I am not saying Thornburg is a bad company. In fact I say that I hope they make it and do well. The issue is whether the stock is a buy, sell or hold and I believe it is emphatically a sell. But that does not mean I do not like the company, although I do think management has done a miserable job of managing their capital.
Sir Sid- do you really think taking 5.5% of the stock price the company may have had in the past is the correct way to analyze the current value of TMA? so much has changed since then; most importantly TMA has lost lots of money when they were forced to sell large chunks of their mortgage portfolio at losses and they have taken on 1.35 billion in new debt at a very high interest rate- 18% now and 12% after shareholder approval; to think in general terms about a recovery in the mortgage and housing market is fine, but you have to start with the numbers, and as I said, even assuming all of TMA's mortgages recover in value to their full face value, you only get to a book value of about .60 with all the dilution. And assuming they will start profitably making new loans, as I said perhaps there will be new value created but how much is realistic? book value is not going to just jump back to some much higher number.
as to the S&P opinion, I read that also and conclude that the author has not studied this deal in near the detail as I. S& P has opinions on literally thousands of stocks and the analysts do not have the time to do the detail as I have done. I would bet if he read my analysis, he would agree with my position. And yes I am short via options but that does not make my reasoning false. At least I am honest and believe me there are many out there spreading false hope that this stock will recover as they profit from others keeping the price up.
SHartwell offered the most on point comment on what TMA's current and future value may be. His comment was that TMA earned 280M when times were good and if they did that again, it would be 0.09 per share with dilution which makes 1.25 in the ball park. I agree that value will be determined by what earnings and cash flow will be on a per share basis, but I do not think TMA will come close to 280M anytime soon. Their business is based on a spread on the mortgages. Their balance sheet has been drastically reduced. Also leverage is reduced and lenders will not allow that to go back to its former levels anytime soon. too many have been burned. Also you must take into account the high cost new debt. But my analysis of future earnings power would be like this:
in 05 at 12-31-05 their ARM assets were 41.84 B; they earned 280M a net spread of .669%; pretty good;
their current arms are 30.7B according to their proforma
-also as a side note the link above is not correct as it takes you to another 8-k and not the one that has the investor materials-
but with 30.7 B if they were to earn the same net spread on this amount of mortgages that is 205M; but in 05 they did not have 1.35 B in debt with a 12% coupon; in effect they have replaced very low cost repo debt at libor plus .5 with 12% debt; so what used to cost them 3.5% or less now costs 12%, an increase of 8.5%; that amounts to 115M in additional interest; so you would have to take that off the 205M to get the projected earnings; that gives you 90M or .0289/share with full dilution; if they are generating new business, let's say even 5B a year and they securitize that and earn 0.5% that could earn maybe another 25M which gives them 115M in earnings which is 0.037/share;
that is why I say maybe the stock can be worth some modest multiple of "recovered value" book of 0.60, to maybe 0.75;
but you have to make many positive assumptions to get there and you are still far below where TMA trades today;
the factor that is not being recognized is how the new shares will affect supply and demand; once those shares can be sold, they will be if the price is anywhere near where it is now; that will result in a quick drop to fair value;
think about it- the debt holders get 2.75B warrants for 27.5M; if they could sell those at even 0.50, they have gotten all their invested capital back plus some; yes maybe they will hold on to some stock in the hopes that TMA will get to 0.75; but if you don't think they will sell this at $1.25, you are delusional. If they could get that price, they would get $3.437B; that would give them all their money back plus 2B in profit; that is the biggest reason TMA is not worth $1.25 or anything near that
but everyone gets to make their own decisions so best of luck to all
If you assume the repo portfolio recovers (which everyone is implicitly assuming), the $1.2 billion in new debt can be levered up in a great spread environment. So earnings of $0.09 per share are difficult to reach, but not ludicurous.
This said, I still don't see much upside in TMA from here, particularly with the share overhang.
What happens if the common shareholders vote to not increase the outstanding shares that would dilute the stock? Could the shareholders block this insanity by not authorizing?
If this happened would this scrap the current deal and force TMA to renegotiate, perhaps with new lenders, and come up with one that is a little more equitable to the commons?
Note to Self: Let Senor Patron out of the cellar on "D-Day"