Thornburg Mortgage Inc. co-founder Larry Goldstone, who spent more than four months securing enough shareholder support to keep his company alive, now must find a new business model.
The Santa Fe, N.M., company, which specializes in "jumbo" loans for expensive homes, won approval this month for a bailout that imposed losses of up to 80% on preferred investors. In rebuilding the business, Mr. Goldstone must develop a way to finance the company that does not rely so much on private lenders, after margin calls ate through cash and left his company on the verge of bankruptcy.
Thornburg thrived for 14 years by providing mortgages of more than $417,000 to borrowers with high credit scores and by investing in top-rated mortgage-backed securities.
Unlike Countrywide Financial Corp. or Washington Mutual Inc., Thornburg never made a subprime loan. In March, fewer than 0.7% of its mortgages were delinquent.
Still, the business collapsed in the first quarter as the credit markets seized up and lenders cut off funding, forcing Thornburg to accept a rescue package from the MatlinPatterson Global Advisers LLC buyout firm.
The March 31 deal gave Thornburg $1.35 billion in loans.
Investors get $5 in cash and 3.5 common shares for each preferred share, which once were valued at $25. These shareholders sold more than 80% of their stakes as of Aug. 19, Thornburg said, exceeding the required 66.7%. The deadline is Sept. 2.
Under the plan, new investors will control about 90% of Thornburg and preferred and common shareholders own about 5% each. Had the shareholders not tendered, MatlinPatterson would have recouped its money, leaving existing investors with nothing, Mr. Goldstone said.
From 2000 through 2006, profit rose tenfold, and the stock price tripled, compared with a 54% gain for the Standard & Poor's 500 Financials Index.
But the stock has lost 98% of its value in the past year as the company racked up $5 billion of losses.
"It's the biggest decline that I've suffered in a stock, and I had a lot of clients in it," said Donald Hodges, the chairman of Hodges Capital Management in Dallas.
Thornburg has until March to obtain about $5 billion of financing to repay lenders. After that, Mr. Goldstone aims to end reliance on so-called reverse repurchase agreements, which let creditors demand cash on a daily basis when assets decline in value.
Mr. Goldstone has 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.
"I wouldn't know how to handicap any one of the four," Mr. Goldstone said this month. "They all have pros and cons."
For Jeffrey Tudas, who owned 15,000 preferred shares at Summit Wealth Advisors in Overland Park, Kan., becoming a bank would be ideal because access to the Federal Reserve discount window protects against credit crises.
"If you're a for-profit enterprise outside of a bank, you don't get afforded the same opportunities," he said.
Before the rescue plan, Thornburg agreed with its lenders to suspend margin calls until March 2009. The deal hinged on raising capital, which required that preferred shareholders tender. The bailout means losses for investors, but the company had no choice, said John Wagner at Camden Asset Management LP in Los Angeles, which owned Thornburg preferred shares while selling the stock short.
"When your house is on fire and someone shows up at your front door with a fire engine, you don't negotiate a price," he said.
