Erich Riesenberg

Thornburg's a Huge Bargain After Monday's Crash

Last year LUM was in much the same position. Hailed as having great management and high quality assets, while many of its loans were CA no or limited documentation. Margin calls quickly took down the company.

The last industry wide margin wreckage I recall which was much the same as it is now was during the Russian crisis. Some borrowers did sue lenders who had made margin calls, and a few, at least, won.

I haven't owned TMA and wouldn't buy it now, because it is just a guess on the value of the oustanding mortgages. However, the chap who compared it to Chrysler, with TMA, once the value of the mortgages has fallen, there is little chance they will recover. The market is flooded. Dow Jones reported the calls were due to UBS writedowns. Unlike Chrysler, there is little chance the market will soon push up the value of TMA's assets. If there is value in any equity, it will be in the preferreds, up to multiples of its stock price, yesterday or today. With Rainwater as an investor, at least there will be some oversight in court.

I still wouldn't buy any myself, knowing where these assets will end up being valued is not possible and likely to continue falling. The only way I considered taking a position here was going long the preferred and short the common, but never did. Generally, the first thing I would look for in a lender is its susceptibility to short term destruction.

Thornburg's a Huge Bargain After Monday's Crash

What's strange to me is why they purchased assets. I can understand if they want to fund loans to maintain a viable business, but buying someone else's securities doesn't seem a core business function, and they spent a billion in January alone.

Thornburg's a Huge Bargain After Monday's Crash

This is basically all the company has reported, from the press release:

"The Santa Fe, N.M., mortgage lender said proceeds were used to reduce the company's debt under its ARM loan warehouse financing lines by about $920 million.

Thornburg said it anticipates more use of collateralized mortgage debt financing and reduced reliance on reverse repurchase financing going forward."

It should have reduced their warehouse line of credit (which is funding companies use to "warehouse" originated loans while awaiting securitization), replacing it on the balance sheet with collateralized mortgage debt. And they are saying they plan to use securitizations rather than reverse repos going forward, which should have been an obvious decision for them last year, or well before. So it replaces short term debt with long term debt, but doesn't impact the cause of their margin calls, at least not much, is my guess.

Thornburg's a Huge Bargain After Monday's Crash

TMA both originates and purchases ARM loans. Currently, the originated loans are funded with collateralized debt, the purchased loans with reverse repos, primarily.

The current margin calls are apparently related to the purchased assets. As of Dec-07 purchased loans totaled $10.7 billion. Now I guess it is $11 - $12 billion, because they bought nearly a billion in January, per the 10K.

There were $11.5 billion in reverse repos at Dec-07. TMA has stated it has $2.9 billion in purchased ARMs that are "super senior ALT-A" which have caused the $570 million in margin calls, $270 million unmet per the March 3 report.

That means about 1/3 of these purchased assets are the so-called Alt-A. The margin call since mid-Feb has been nearly $600 million or 20% of the $2.9 billion.

The recent securitization is likely originated assets, because that is how TMA has operated and it would be odd to securitize assets which TMA already bought as securitized assets. This securitization might free up some assets to help meet margin calls, but it probably is not directly related to those assets.

The preferred is interesting here because it is so far below liquidation value, and the high stated yield. It is curious the F is priced well above the others, and had high volume today. All the outstanding preferreds rank equally, per the September offering document for the F preferred.

As for the leverage, at Dec-07 TMA had about $15 billion in non-securitized loans, and $13 billion in various debt other than securitizations. The market value of the non-securitized loans has apparently fallen more than a half billion dollars in the past couple weeks.

Thornburg's a Huge Bargain After Monday's Crash

At Dec-07 TMA had $36.5 billion in debt, primarily $11.5 million Reverse Repos and $21.2 in Collateralized Mortgages. With Reverse Repos, if the value of the loans decrease, as they have, the borrower can get a margin call. Collaterlized Mortgages are financings where there are senior and junior layers, the senior layers use the juniors as collateral. This is generally more stable financing, and generally not liable to margin calls.

I thought TMA may have converted some Reverse Rept to Collaterlized Debt, but the securitization appears to be of originated prime loans, not the purchased Alt-A securities causing the recent margin calls.

The F Preferred, for instance, has a 10% yield on $25 liquidation value. At a market price of $10.50, that is a 24% yield. If the company survives it goes back to $25 per share.

If the debt were all long term, the credit quality would likely be the primary factor. With margin debt, market value matters.

Thornburg's a Huge Bargain After Monday's Crash

There is not a billion dollar improvement in cash, it is unfortunate the company provided so few details on such an important topic. Check out the Dec-07 balance sheet. What apparently happened is a billion dollars in debt listed as Reverse Repurchase is moved to Collateralized Mortgage Debt. A similar recharacterization of loans on the asset side. This is likely an improvement, reverse repurchase agreements can lead to margin calls, but $1 billion in cash does not get transferred to TMA. A sale at par may have done that.

A lack of understanding of these things is what allows cyclical boom and bust fiannce companies continue. In 2001 the company had about $5 billion in assets, at year end it was over $36 billion.

If a person is interested in buying TMA, I don't understand the appeal of the common stock versus the preferreds.