Deal could save Thornburg Mortgage

Some investors say agreement will hurt shareholders; analysts say alternative is bankruptcy

Bob Quick | The New Mexican

4/1/2008 - 4/2/08

Thornburg Mortgage, struggling to avoid bankruptcy, has completed a deal with its lenders that gives the company a chance to survive and even prosper again, Larry Goldstone, the firm's president and chief executive officer, said Tuesday in a telephone interview shortly after his return from New York.

"That certainly is the hope," he said. "It's an opportunity for the company to re-establish its footing and to begin to grow again and re-establish itself in the mortgage-lending business."

Goldstone's meetings with investors helped raised $1.35 billion through selling bonds, warrants to purchase its common stock and interests in various mortgage assets. Of that, $200 million will be held in an escrow account and returned to the company when a tender offer for its preferred stock is completed.

The talks also created for Thornburg Mortgage a "liquid position for at least the next year, which is what most people think it will take to get to the other side in this market environment," Goldstone said.

Goldstone described the negotiations with lenders as "highly collaborative and creative," the latter because the agreement involves "new equity investors and new equity participants" who will provide Thornburg the seed capital needed to change Thornburg Mortgage capital structure over time.

Until recently, the company "was simply caught in a financial structure that was not working in the world as we know it today," Goldstone said in describing the company's credit squeeze. "The hand the market dealt us was in my mind nothing created by Thornburg Mortgage."

Investors who buy bonds issued by Thornburg Mortgage will earn a whopping 18 percent interest rate initially and warrants to buy Thornburg stock for a penny per share.

That cheap, newly issued stock also means investors will own up to 90 percent of the company.

According to the terms of a principal participation agreement, investors also will receive monthly payments from Thornburg Mortgage that the company gets from its portfolio of mortgage securities.

The proceeds from the deal with lenders will allow Thornburg Mortgage to pay off the margin calls that threatened to drive the company into bankruptcy. The calls began last August and peaked in March.

Margin calls occur when a lender demands additional capital from the borrower to shore up collateral that has declined in value.

The agreement must be voted on by shareholders, and Thornburg Mortgage has said the vote will take place at a shareholder meeting to be held no later than June 15.

Thornburg Mortgage may have avoided bankruptcy, but the agreement with its bank lenders will result in a dilution in value of the company's stock, hurting current shareholders, analysts and shareholders pointed out.

"Thornburg, Goldstone et al have just proposed a 'plan' that would essentially wipe out the current shareholders of the company," said investor Patton Glade of Austin, Texas, in an e-mail to The New Mexican's business desk. "The so-called 'rescue plan' is more like a bankruptcy reorganization plan without actually filing for bankruptcy."

The plan means "current shareholders will be massively diluted in their ownership," Glade added.

Sean Egan, managing director at Egan-Jones Rating Co., an independent credit rating company, told the Wall Street Journal Online: "The deal, if consummated, comes at exorbitant cost to existing stock investors and debt holders. The shareholders are faced with massive dilution."

But Bose George, an analyst at Keefe, Bruyette & Woods, told The Associated Press that Thornburg Mortgage had no alternatives. "If the deal doesn't go through, lenders will liquidate the company so shareholders would presumably end up with nothing," he said.

"The fact of the matter is that it's true," Goldstone said of shareholder dilution. "But this is a market environment that very few people understand. I think it's unfortunate (that investors are seeing their share values decline), but this is the best alternative we had in this sort of situation. The alternatives were far more dire. In time, we hope we can recapture some small part of their original investments."

Santa Fe certified financial planner Patrick Flanagan agreed. The agreement Thornburg worked out with its creditors was "a raw deal" involving up to 95 percent dilution for shareholders, he said.

"But at the same time," Flanagan added, "the alternative (bankruptcy) was going to be less than that. Now they're still a going concern, and hopefully they will build on their revenue and income and book value going forward."

Flanagan also said some of his clients still own Thornburg Mortgage, shares they bought at prices well below the $28.40 high reached last summer.

"There's not a lot anybody can do now but watch it and see how things transpire," he said. "We're assessing how long to hold the shares and what the potential is of the price going up."

Contact Bob Quick at 986-3011 or bobquick@sfnewmexican.com.

March was a difficult month for Thornburg Mortgage:

March 4: Thornburg Mortgage shares fall 47 percent after lenders call in loans. Stock closes at $4.69.

March 5: More rating agencies list downgrades for Thornburg Mortgage. Shares close at $3.96, down almost 18 percent.

March 7: Several defaults with lenders triggered. Thornburg Mortgage shares fall 52 percent, closing at $1.65.

March 12: Thornburg Mortgage shares rally after the Federal Reserve injects cash into the banking system. Shares close up 85 cents, or almost 120 percent, at $1.56.

March 20: Thornburg Mortgage given a week to raise $1 billion or be forced into bankruptcy.

March 31: Thornburg Mortgage raises $1.35 billion, breathing new life into the company. Shares close the quarter at $1.21, down 44 cents for the day.

April 1: Thornburg Mortgage shares close at $1.45, up 24 cents per share, or almost 20 percent, as Dow Jones Industrial Index gains almost 400 points.