Thornburg Mortgage (TMA)

The company finally filed its long-awaited 10-Q on Wednesday, but the quarterly report contained some dire news for investors and the market.

First, Thornburg received a notice from the SEC that the regulator is conducting an investigation into the restatement of the company’s 2007 financial statements, margin calls that it received, and how it marked the value of MBS on its books.

Second, the NYSE said that it is reviewing transactions in Thornburg common stock prior to the company’s January 9, 2008 disclosure of the impact of recent market events in the mortgage industry on the Company’s GAAP book value.

As if the legal woes weren’t enough, Thornburg still faces significant liquidity challenges, trotting out the dreaded “going concern” warning — particularly if the interest rate on its senior subordinated notes is not reduced. To reduce the interest rate on the notes, Thornburg has to get an extension on the tender offer for its preferred shares; it also must get two-thirds of each class of preferred stock to be tendered.

And judging by the venom spewed on last week’s earnings call, TMA has a very steep battle ahead. Shares of Thornburg tanked on Thursday, dropping 65 percent to just $0.23/share; they were up 2 cents to $.25 per share Friday morning.

As on March 6, Thornburg Mortgage (TMA) said it failed to meet a $28 million margin call from J P Morgan Chase (JPM), triggering a series of "material" cross-defaults on various lending agreements.

JPM's lending agreements with Thornburg total about $320 million, a small fraction of the $11.5 billion in reverse repurchase ("repo") agreements that TMA had as of December 31, 2007. Nonetheless, JPMorgan refused to budge, notifying Thornburg that it planned to exercise its rights under the loan agreement (i.e. seize the underlying collateral) due to the default. Shares of TMA obviously tanked on the news.

1. The company failed to meet its obligations under a loan with JP Morgan.
2. JP Morgan has decided to excercise its rights under the agreement to collect on the $320 million that it is owed.
3. This event has gone awry of clauses in all of Thornburg’s other lending agreements, and pushed it into default over them.

Before paying preferred dividends, Thornburg lost $3.31 billion, or $20.64 a share, in contrast to a profit of $75 million, or 62 cents a share, a year earlier.

Thornburg specializes in larger mortgages, known as jumbo loans, which total more than $417,000. The company said the value of securities it owns dropped sharply during the quarter amid a slowing economy and continued housing slump, forcing it to take market-value losses of $1.54 billion.

June 12,2008

First Quarter loss $3.31 Billion reported.

Thornburg also recorded $949.1 million worth of charges related to financing.

Thornburg faced margin calls of about $1.8 billion in the first two months of the year. By March 6, the company had paid out $1.2 billion of those calls, but did not have enough cash to pay back the remaining $610 million, forcing it to sell some of its portfolio and seek alternative financing.

Thornburg’s mortgage are all private sector i.e. not guaranteed by Fannie or Freddie with the implicit backing of the U.S. government

Thornburg is heavily leveraged and its large portfolio of mortgage backed securities is financed by debt. If it has to pay all that debt back immediately, it will have to sell large parts of its portfolio at fire sale prices in order to meet its obligations, resulting in massive losses.

Since December 31, 2007 it has received $1.777 billion in margin calls, of which it has been able to meet $1.167 billion. That leaves the company with a $610 million shortfall as of the close of business, 10th March.