Why Thornburg Mortgage Will Survive

by: Tim Plaehn August 21, 2008 | about stocks: TMA    
Tim Plaehn

Tim Plaehn

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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 yesterday. 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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This article has 22 comments:

  •  
    Aug 21 09:48 AM
    The author writes:
    "The tender requirement has been met and Thornburg will now have the assets and capital to resume business operations"

    Yes, but for how long? As usual, most people seem to think that this housing/credit/debt bubble is somehow going to be done with over the next 6 months. Of course we have been hearing that for the past 16 months already.

    As someone who is based in NY, involved for the past 20 years in the housing industry, and with contacts all over the US, I can state with authority the housing mess (the real root problem that exposed how corrupt and leveraged our financial system really is) is far from over.

    I hope your long position in TMA is not to large. They are going bankrupt and will be gone within the next 12 months.

    Note- I hold no short position, in any market, with respect to TMA.

    Good luck.
    Reply | Link to Comment
  •  
    Aug 21 09:58 AM
    If you are considering a position in TMA, I would recommend looking at the preferred issues. If you buy them today, tender the preferred you will be getting $5.00 cash per share and 3.5 shares of the common. This works out to be a 6-8% discount to current common share price.
    Reply | Link to Comment
  •  
    Aug 21 10:16 AM
    I have a serious problem with your line of logic for many reasons

    1. the shares are diluted...projected shares outstanding on fully diluted basis will number in excess of 3 BILLION...

    2. Management clearly showes in this link here that BOOK VALUE is 8 cents after tender...WITH FULL WRITE UP POTENTIAL of 60 cents
    yahoo.brand.edgar-onli...

    the problem with this is that the JUMBO ARM loans they hold in repo lines (yes the original ones that gave them margin call) are not ones TMA originated...they were bought on the open market and not all of them are AAA...even so I wouldnt want to bet they achieve par value for these...also to note at current they are geared 170x....

    3. THEY have a heavy vig to pay going forward and NO ACCESS to new repo lines (per override agreement) |ABCP market is shutdown and they even burned a money market fund....also CMO market for any type of ARM product is dead...you cant borrow at 12% and lend at 8%

    so this leaves the question...how do they get money to lever up and loan???? I dont see a way right now and they are not currently doing new loans

    so dot hey survive....maybe...ear... power going forward...NONE RIGHT NOW

    also to note they will have no access to equity markets for funding as they essentially made a mockery of pref shareholders

    so if you dont mind paying 3x book value for a stock that has no earnings power and is essentially in a run-off then yes TMA is a great value...also be aware the real future of the company hinges on 7 billion of Jumbo ARM LOANS THEY DIDNT ORIGINATE...and one more point to ponder...the tender of the preffered will likely just release more supply of TMA stock on the market as

    1. the arbs sell to gat the arb price
    2. burnt pref investors ride themselves of the whole TMA experience




    Reply | Link to Comment
  •  
    Aug 21 10:17 AM
    Excellent analysis, thank you. I agree TMA has a better chance of survival with their ability to restructure their debt. This company is months ahead of many competitors in it's sector that will be unable to find cheap money for their debt load. At this point, I believe the January 2010 $2.50 calls are a buy at .05-.10.
    Reply | Link to Comment
  •  
    Aug 21 02:26 PM
    You're blowing thru your hat.

    They raped the preferred stockholders,
    1. The dividends used to be cumulative, now they're not
    2. The company can pay dividends on the COMMON stock and not the preferred.
    This is a neat way to loot the company at the expense of the pf holders.
    No one with a memory will buy any type of stock they want to sell in the future.
    And of course, management continues to be paid very well.
    Reply | Link to Comment
  •  
    Aug 22 05:20 AM
    Thornburg has until March to obtain about $5 billion of financing to repay lenders.
    Reply | Link to Comment
  •  
    Aug 22 07:26 AM
    Some NINJA (no income, no job-assets) JUMBO ARMs loans were rated as AAA by Moody's, so TMA is having a hard time dealing with them, in addition to this they have to come up with 5 billion if not more to repay lenders, on top they are facing potential raising in interest rates from the FED to battle inflation, so there is lot of cons that the company need to walk through in order to survive.
    Reply | Link to Comment
  •  
    Aug 22 10:40 AM
    why would anyone want to mess with this? isnt there someother place to make money?beware of these authors on this & other sites. they all have an agenda.
    Reply | Link to Comment
  •  
    Aug 22 01:43 PM
    When I wrote this article TMA was 25 cents a share. Seems the market gets it.
    Reply | Link to Comment
  •  
    Aug 22 02:53 PM
    Per Bloomberg www.bloomberg.com/apps... Thornburg management is seeking a "new business model" either as a generator of conforming mortgages or as a bank. In other words management concedes that there is no value in their previous business model. How much would you pay for Thornburg's office supplies and furniture? Because that's pretty much what they've got.

    I worked up an earnings model for Thornburg, it goes like this:
    12% cost of funds > 7% interest rate collected on mortgages = TMA.BK.

    As for the "pop" from $0.25 to $0.35, it has been my experience that penny stocks "pop" all the time, but it's usually because of a spam blast.
    Reply | Link to Comment
  •  
    Aug 22 03:41 PM
    I think TMA will (somehow) in order to save-face, let alone their asses in the long run, eek their way back to a half-way reputable position in their line of work. Obviously, it'll take a while. Sure, they could also go belly-up.
    1. hold what y'got; for years...
    2. maybe try daytradin' it
    3. remember, you're GAMBLING with any&every stock purchase
    4. sure sucks when y'lose, huh?
    Reply | Link to Comment
  •  
    Aug 22 03:59 PM
    John, I do not think Thornburg will get too far away from their previous business model. They just need to find some more stable financing options. They did not write Alt-A business or use computer scored credit apps. Their underwriting standards were significantly tougher than "conforming" standards because they planned to hold the mortgages they originated rather than packaging them up and selling to an unsuspecting investors.

    Sorry, I just read the Bloomberg article and Larry Goldstone outlined 4 possible options of which you only mentioned two:

    "Goldstone outlined four options: obtaining secured financing from banks; selling its portfolio of assets as a security; gaining government protection by starting or buying a bank; or adjusting its reverse-repurchase model."

    The main reason I write my blog and do stock analysis is that the major financial news outlets often get the facts wrong about many companies especially outside the megacap mega-interest stocks.
    Kind of like your comment above.

    I currently own some stock in TMA's DRIP program. Fortunately I sold the bulk of my account last year at around $25. I still like the company, people and how they do business. I hope they thrive and prosper. The recent successful tender of preferred shares allows them to stay in business and try to rebuild from here.
    Reply | Link to Comment
  •  
    Aug 22 05:39 PM
    Well it's easy to see from the comments who is short on TMA, and distort is what they do best. This was a great short for the past year but its past time to close out those positions. Seabassbanker you can throw away that chart that shows $0.08 book value. TMA long ago indicated that it had problems. The accounting for the restructuring deal was too complicated to get it right overnight.

    TMA has a great asset generation business model. Look at its delinquency rates. They are the best in the business. What it needs to fix is its liability finance model. It used Repos because they were the cheapest source of funds. The market then decided it couldn't tell the difference between good loans and bad loans and marked everything down. The subsequent margin calls killed them. I think they will find a bank with a good branch deposit system to fund themselves. I would go for Downey Savings if they didn't have so many bad loans. Maybe their new controlling shareholder, Matlin-Patterson, could help them structure a good deal.

    Disclosure: Long TMA Preferred and short Common, so I'll be out when they pay off the Preferred tender, unless I decide to buy some more of the Common.
    Reply | Link to Comment
  •  
    Aug 23 02:07 PM
    This article reminds me of the calls I used to get from brokers hawking penny stocks. You gotta be nuts to buy TMA. They are getting what they deserve.

    Don't be a hero.
    Reply | Link to Comment
  •  
    Aug 24 08:28 AM
    I think the operant point to consider , which is often overlooked yet prima facie , is that the risk/reward in this company makes it silly to bother with - period.

    Who cares if it rises from .25 to .35 ?

    Or even to a buck -

    Please remember that the value in buying distressed stocks is that they retain their former potential in one form or another and can possibly rise back to former levels -

    ie: I took a shot at AES after it dropped to 1 (from 60!) because its South American problems and the industry collapse in general didn't warrant the drop -

    It was still a viable , worldwide energy producer.

    I eventually sold my shares at 16 , and my bonds doubled, + 16% int. while holding , when called at par. (I bought them in 40's w/8% coupon).

    Thornburg has no such potential for this per dilution ,can EASILY (though not for certain) still go bust , and it is foolish to take risks here with many other beaten down stocks with much more safety and potential gains.
    Reply | Link to Comment
  •  
    Aug 24 02:51 PM
    A pig wearing a tuxedo is still apig. There are many great stocks like Mo and PM andKFT that combine dividends safety and growth
    Reply | Link to Comment
  •  
    Aug 25 12:03 AM
    Survival requires more equity which means more dilution. Besides who wants to buy a minority interest in a 95% controlled company. Whose interests do you think will come first?
    Reply | Link to Comment
  •  
    Aug 25 01:33 PM
    Question addressed to Tim Plaehn author of the article :
    Can you please explain how TMA could become profitable given that its cost of funds surpasses its return?:
    12% cost of funds > 7% interest rate collected on mortgages
    Thanks
    Reply | Link to Comment
  •  
    Aug 26 10:22 PM
    tma was agood buy @.25 Istocked up on 20,000 shares and just dumped it today trying to catch 49 cents per could not unload all but did make a few clams in a week or so time....

    [ED: Comment edited to remove abuse.]
    Reply | Link to Comment
  •  
    Aug 27 02:28 PM
    Tim,

    do you see a pop in this stock once the debt is restructured as of 9/3?
    Reply | Link to Comment
  •  
    Sep 04 08:46 AM
    If you like TMA then also try IMH, HCM and the only one that has a chance, FBC.
    Reply | Link to Comment
  •  
    Oct 19 11:01 AM
    HOW DAT TMA DOING NOW MY FRIEND???

    OH WELL...TOO BAD
    Reply | Link to Comment
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