Thursday, August 28, 2008


It is about a year ago now that the credit crisis first started affecting jumbo mortgage originator Thornburg Mortgage (TMA). In early August 2007 the stock was still trading in the low $20’s and rumors were just starting about what was soon to become a full blown crisis in the mortgage industry. Thornburg was hit hard in the fall of 2007, but it appeared that the company would continue OK on the strength of its high quality mortgage portfolio. The share price fell as low as $7.60 before recovering to the $10 range until late February. Business seemed to be going well as the 4th quarter earnings were released in February 2008 and by that time many competitors had dropped from the market and the company anticipated growing profitability.

Within 3 weeks, however, the other shoe fell. Thornburg started receiving margin call on repo agreements pledged with the company’s mortgage securities. Soon the margin calls approached $1 billion, some mortgage assets were taken by some lenders and suddenly Thornburg was within days of going out of business. To save the company, management found investors willing to provide about $1.3 billion in cash in exchange for 18% interest and a couple of billion stock warrants at a penny each. The investors also would collect the principal payments on most of Thornburg’s $20 billion (guesstimate) mortgage portfolio until the end of time unless the current shareholders agreed to a couple of changes.

First, common shareholders had to agree to the tremendous the issuance of the extra shares and the tremendous dilution that would follow. The measure was approved during the June shareholders meeting. Then the holders of several classes of Preferred Stock shares had to agree to tender at least 2/3 of the outstanding shares in exchange for $5.00 per share (they were issued at $25.00) and 3 shares of the now penny-stock common. If the preferred shareholders did not tender the required 66 2/3% of the shares, Thornburg would have no asset base to continue business. The preferred owners had until August 20 to tender their shares.

Thornburg Mortgage issued a press release to extend the tender acceptance period until September 2, but this note caught my eye (emphasis added):

As of 5:00 p.m., New York City time, on August 19, 2008, holders of Preferred Stock had tendered approximately (i) 88.7% (5,786,035 shares) of the Series C Preferred Stock; (ii) 83.5% (3,340,873 shares) of the Series D Preferred Stock; (iii) 91.7% (2,900,546 shares) of the Series E Preferred Stock and (iv) 96.2% (29,161,031 shares) of the Series F Preferred Stock.

The tender requirement has been met and Thornburg will now have the assets and capital to resume business operations. The interest rate in the borrowed funds drops to 12% and about a billion dollars of dividend earning preferred securities disappear. Today the market continues to value the very diluted company at the 25¢ a share it has traded near for the last 2 months.

During the recent conference call to explain why the company need the preferred shares to be tendered, CEO Larry Goldstone hypothesized that the book value of the company would be somewhere in the $1.00 range once the preferreds were retired and the restrictions were removed from the company’s remaining assets. In addition, Thornburg will soon be able to start originating jumbo mortgages again. This sector of the mortgage market is now almost nonexistent and TMA should be able to generate some very nice profits meeting this currently unfilled need.

I am a bit surprised the share price did not jump. Maybe the market missed the facts I outlined above or they are waiting for some further indication the company will prosper. I was very tempted to pick up a few shares yesterday, but elected to wait for more good news.

Note: I have a long position in TMA.

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