Hugh Entrekin

Is Thornburg Mortgage Common Really Worth $3.88B?

Wolves- the alternative to shareholder approval is the interest rate stays at 18% and the participation agreement stays in effect which says the debt holders get all principal payments on all the company's mortgages for 7 years; as I said in my original post, this is a strangle hold, and will surely lead the company to bankruptcy, as in effect as mortgages pay off and as monthly principal payments are received this money goes to the debt holders; TMA's own materials say this could be worth $2.2B; and TMA still owes these guys $1.35B plus 18% interest for 7 years, so the dilution, while bad, is better than this alternative;

April 11 is the day the company issues the first warrants; the NYSE exception says they must send a letter to the shareholders at least 10 days before issuing shares that would otherwise require shareholder approval explaining that the new shares will be issued in reliance on the "financial viability" exception; in other words, TMA had no choice but to do this deal when they did as otherwise their repo lender standstill agreement required them to raise 948M in new capital by 3-31 or the standstill agreement went away and the repo lenders would proceed to sell the mortgages to pay themselves back;
so the 10 days from the shareholder letter has passed and now the warrants are issued and will be exercised by the debt holders;- this is just the first tranche of warrants being the 197M I think but I also think the repo lenders have gotten their 47M warrants;
but it is unclear when these new shares will be registered for trading and when they could be sold; I think that the debt holders and repo lenders will try to find a way to sell their new shares or lend them to short sellers who will sell other shares even though they are not registered; but I do not know this; it could be that none of the new shares will be sold or lent so as to affect the number of shares that others could be short until they are registered;
but TMA is obligated to register them and so it will happen, just not clear when.
and as I've said the big kuhuna comes when the remaining 2.5B warrants get issued and those shares can be sold;
it may be that some effect can start next week or it may not be for several months, but it is coming

Is Thornburg Mortgage Common Really Worth $3.88B?

thanks for all the comments; I will try to briefly address them;

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