As soon as Thornburg Mortgage Inc. managed to address one financial hurdle, it disclosed another, thrusting the beleaguered company back into survival mode ahead of a crucial tender offer deadline next week.
The Santa Fe, N.M., jumbo lender said Tuesday that it had secured the shareholder approval needed for the tender offer, which would enable it to reduce significantly the coupon on bonds owned by its main investor. However, Thornburg also revealed that it faces another round of margin calls, and has temporarily suspended funding loans, though it does not expect these issues to scuttle the tender arrangement.
"At every turn, we find new challenges," Larry Goldstone, Thornburg's chief executive, said during a conference call with analysts Tuesday to discuss its second-quarter results. "Our circumstances are somewhat precarious, to put it mildly."
However, he also said that he is "optimistic or hopeful of a resolution" with lenders. "We believe we can stabilize our financial situation and return to profitability."
Mr. Goldstone said the company has approval for the tender from more than the required two-thirds majorities in each of four classes of preferred shareholders.
Under a deal struck in March, Thornburg received a $1.35 billion capital infusion from an investor group, MatlinPatterson Global Advisors LLC, which saved the company from bankruptcy.
Shareholders are just now approving that deal, which also called for Thornburg to buy back 90% of its preferred stock from the investor group, in exchange for reducing the coupon on the MatlinPatterson bonds, from 18% to 12%, and terminating its "principal participation agreements, whereby millions of dollars in interest profits would be diverted to the group for seven years."
In a filing Monday with the Securities and Exchange Commission, Thornburg said it had paid $219 million in margin calls on Aug. 2 after Fitch Ratings Inc. changed its rating methodology and downgraded some classes of mortgage-backed securities in the company's portfolio. Thornburg also said it has identified additional downgrades that would prompt $25.9 million more in margin calls. It has paid the margin calls out of a $350 million liquidity fund.
Fitch Ratings downgraded $79 million of Thornburg's mortgage-backed securities in the second quarter, and $1.1 billion to date in the current quarter, according to the filing. Moody's Investors Service and Standard & Poor's may also make downgrades, though Mr. Goldstone said the company "still has ample credit support" and is "adequately protected."
Still, Thornburg said in the SEC filing that it could give no assurance that it would not get additional margin calls or that future margin calls would not exceed the balance in the liquidity fund.
Wall Street responded favorably to the mixed bag of news.
Shares of Thornburg were trading as high as 62 cents Tuesday morning closed at 49 cents, up 22.5% from Monday's close.
"There is some optimism about the tender going through," said Kevin Starke, a vice president at CRT Capital Holdings LLC, a Stamford, Conn., investment bank, but noted that "there's still plenty of risk here."
Thornburg has been so "bogged down" getting approval of the tender offer that it has not devoted time to replacing its repurchase financing, Mr. Starke said. If the issues regarding its payment obligations and funding from its liquidity reserve accounts are not resolved, the potential exists that Thornburg "would have no means of funding," he said.
Mr. Starke also noted that the downgrades by Fitch were for mortgage securities not originated by Thornburg. "For them to be torpedoed by stuff they didn't originate is a sad irony," he said.
One bright spot for the company was a fivefold jump in its second-quarter profit, to $412.3 million, or 84 cents a share, compared with $78.1 million, or 66 cents a share, the year earlier. The earnings increase came largely from a one-time, $536.9 million fair-value gain related to the MatlinPatterson agreement.
Mr. Goldstone said that, absent one-time items, Thornburg was profitable, with $22.7 million of net income. The company originated $243.6 million of adjustable-rate mortgages in the quarter and wants to sell them because it was unable to complete a securitization.
Thornburg's short-term strategy is to find another finance partner to replace its repurchase lenders. Mr. Goldstone said that in the long term the company is exploring options for reducing its reliance on the capital markets and has considered a partnership with or purchase of a bank.
The lastest round of margins calls is reminiscent of two previous ones.
In March, Thornburg faced $1.8 billion in margin calls and was able to avert bankruptcy when its five lenders — the former Bear Stearns Cos., Citigroup Inc., Credit Suisse Group, Royal Bank of Scotland Group PLC, and UBS AG — agreed to suspend further margin calls while the company negotiated the MatlinPatterson bailout. In August 2007, Thornburg had to raise $500 million to meet margin calls and faced a liquidity crisis when the value of its securities tanked.
