The End of the Road Likely for Thornburg, Say Market Folk

Mar.07, 2008 in Market Outlook

NEW YORK (Dow Jones)–It may be the end of the road for Thornburg Mortgage Inc.
(TMA).

Backed into a corner with demands from jittery creditors as its mortgage
securities plunge in value, and, faced with a dearth of funding options, the
real-estate investment trust is likely to be forced into calling it a day.

“The company’s prospects are fairly dim at this point,” said Sean Egan, a
managing director at independent credit-rating firm Egan-Jones Ratings Co. “They
have already received default notices and are unlikely to find liquidity to save
them.”

The Santa Fe, N.M.-company has few options at this point.

For one, its market value has plunged to around $190 million from $5 billion in
May, making it very difficult for Thornburg to raise funds in the equity market,
said Egan.

It may find little comfort in credit markets too, as wary investors stick to the
sidelines, fearful of mortgage-related investments as the subprime malaise
spreads to securities previously considered safe.

“Once a company is unable to make payments to its lenders, it’s likely to file”
for bankruptcy protection, said Hugh McDonald, a partner in law firm Thacher
Proffitt & Wood LLP’s bankruptcy and creditors’ rights practice group.

“It is unlikely that existing or new lenders will lend to a company with the
potential to file for Chapter 11 bankruptcy,” said McDonald. This is because the
rights of lenders weaken once a company enters into bankruptcy protection.

A sale of the company is also being ruled out, despite its current lower
valuation. Although another struggling mortgage lender, Countrywide Financial
Corp. (CFC), was recently rescued when Bank of America Corp. (BAC) agreed to buy
it, it is unlikely that a similar fate will befall Thornburg.

This is because in the Countrywide deal, there was pressure from regulators who
wanted to avert a potential run on the mortgage lender’s savings-bank unit, which
could possibly have deepened and broadened the credit crisis.

Thornburg doesn’t “have the support from regulators pushing for a combination” of
the company with another, said Egan at Egan-Jones.

“The worst-case scenario is that the company falls of a cliff and goes into
liquidation,” said McDonald at Thacher Proffitt. “Normally, fire sales and a
free-fall bankruptcy don’t provide the returns that they could get from an
orderly wind-down of assets.”

Thornburg on Thursday was circulating a list of slightly more than $4 billion in
alt-A mortgage bonds available for sale as the home-loan lender struggled to
raise funds to meet demands from its creditors.

Alt-A loans are made to borrowers with generally strong credit but are loans that
lack adequate verification of, for instance, income or assets. This lax paperwork
paved the way for aggressive lending to the less creditworthy and emboldened
borrowers to exaggerate their financial prowess.

They were being offered at a discount of more than 90 cents on the dollar to as
low as about 75 cents, said an investor familiar with the matter.

Potential buyers of these securities are also likely to stay away from the
marketplace because of concern that more forced sales by other mortgage lenders,
including beleaguered banks struggling to shore up their balance sheets amid
hefty credit losses, will further lower the prices on mortgage securities, and,
in turn, fuel more fire sales.

“The problem is that pricing is very uncertain in mortgages,” said Jeffrey
Murphy, a partner in the structured finance department at Thacher Proffitt, as
the supply of mortgage-related investments overwhelms demand for them.

Going Down, Down, Down

Thornburg’s most recent problems began two weeks ago when UBS AG (UBS) announced
that it was writing down the value of securities backed by Alt-A mortgages, that
is, near-prime loans, a move that decreased the value of similar securities held
by Thornburg that it was using as collateral on its borrowing agreements.

The company’s creditors responded by requiring Thornburg to put up $300 million
in additional collateral, which it was able to do using its cash reserves.

But last week, Thornburg was hit by an additional $270 million in margin calls as
the value of its collateral fell further, and the company said it wasn’t able to
meet “the majority” of the new cash requirements.

Thornburg said it has received $1.78 billion in margin calls this year and has
met $1.17 billion of them. The remaining $610 million “significantly exceeded its
available liquidity.”

The company also said Friday that there is “substantial doubt” about its ability
to continue as a going concern, citing deterioration of prices of mortgage-backed
collateral and a liquidity position that is under unprecedented pressure.

Thornburg reached a temporary deal with the remaining parties holding securities
as collateral that the firm could be forced to buy back, and that freezes further
margin calls through Friday. It has received default notices from four lenders as
a result of not meeting reverse repurchase agreements, under which it borrowed
from investment banks, using its mortgages as collateral.

“Our view is that the company is facing significant challenges related to
short-term lending agreements,” said Steven Marks, a managing director in the
real estate investment trust group at Fitch Ratings. Fitch downgraded Thursday
its ratings on Thornburg as the mortgage lender defaulted on its obligations.

“The credit quality is pretty poor given the multiple defaults,” said Marks. “The
company doesn’t have adequate liquidity or access to capital.”

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