Luminent soars on Arco bailout; Countrywide down on layoff buzz; Thornburg's stock falls

By Sheri Kasprzak

New York, Aug. 20 - Mortgage lenders topped headlines again Monday but the news wasn't all bad.

"A lot of [mortgage] lenders realize they have to do something," said one analyst Monday morning. "Things have gotten really bad and many of them are making the moves necessary to minimize the damage. They're seeking out liquidity as best they can."

Shares of Luminent Mortgage Capital Inc. skyrocketed Monday on word that Arco Capital Corp. Ltd. agreed to buy a majority stake in the mortgage lender's - at a 76% discount to market price.

Meanwhile, Countrywide Financial Corp.'s stock continued to slide after an internal e-mail indicated the company may be laying off an undisclosed number of employees.

Late last week, Countrywide said it was tapping an $11.5 billion credit facility, shoving its shares down 10.99%.

In other mortgage news, Thornburg Mortgage, Inc. saw its stock continue to slide on Monday after the company said it will sell a large chunk of its AAA-rated mortgage securities portfolio.

Luminent to sell stake to Arco

The sale of Luminent's majority stake to San Juan, P.R.-based lender holding company Arco comes after eight of the REIT's lenders demanded payment on $1.6 billion in loans following defaults.

Even though the new capital may assuage the fears of investors for now, one sell-side trader said it still may not be enough.

"They may still have some serious liquidity problems, even with this sale," he said. "It helps in the short term because it's a partial solution and their investors want to know what's going on. They want to know that there is at least some plan in place to bail them out."

An analyst said even though he didn't see this particular move coming, he felt something needed to be done.

"I would have supposed something closer to a bankruptcy filing," said the analyst. "I knew something along these lines would happen. I don't think they had much of a choice."

Arco received warrants to purchase up to a 49% voting equity stake and 51% economic interest in Luminent, exercisable at $0.18 each for five years, beginning Aug. 30.

Arco also plans to inject $60 million of capital into Luminent and buy $65 million in mortgage assets from the troubled investment firm.

"Luminent's board of directors undertook a thorough search for strategic alternatives that could address and resolve Luminent's liquidity issues in the best interests of Luminent and its stockholders," said Luminent's chief executive officer, Trez Moore, in a statement.

"The board believes that, even with the possibility of sizable dilution to existing Luminent stockholders, the transactions proposed by the letter of intent with Arco create the best path both to attempt to protect current value and grow potential value going forward. The board believes that, if implemented, the arrangements proposed by the letter of intent will provide Luminent with short-term liquidity relief and position Luminent to preserve the value of its investment positions."

By 10 a.m. ET, the stock had put on 52%, or 39 cents. It fell back after that but still finished up 8%, or 6 cents, to close at $0.81 (NYSE: LUM).

Volume of Luminent shares traded on Monday zoomed with 5,419,400 shares, compared with the average 2,163,710 shares.

San Francisco-based Luminent plans to elect four new board members and the four existing directors will submit their resignations to the board once those new members are elected.

Rumors of layoffs at Countrywide

Elsewhere, Countrywide's shares continued to slip on Monday after an e-mail was released to employees at the mortgage lender warning of imminent layoffs following a slew of troubles.

Shares of Countrywide fell by 7.56%, or $1.62, to close at $19.81 (NYSE: CFC).

On Monday, Countrywide sent an internal e-mail announcing that it will begin laying off an undisclosed number of employees in its Full Spectrum Lending unit. That unit handles mortgages for customers with minor credit problems.

Even as the layoffs were announced, Countrywide attempted to fend off fears that its banking arm is in trouble.

"Basically, it's damage control," said one sell-side trader. "Of course they want to assure their customers that everything is fine. When you're laying off employees though, it's hard to say, 'Don't mind that, everything is fine'."

Thornburg to sell assets

In other mortgage-lending news, Thornburg Mortgage is gearing up for a sale of its AAA-rated mortgage securities portfolio.

Thornburg also said in a statement released Monday morning that it plans to reduce significantly its borrowings portfolio.

"The company took these actions to address challenges in meeting its liquidity and financing needs caused by rapidly declining mortgage securities prices and simultaneous declines in the value of its hedging instruments," said the statement, in part.

"These rapid declines negatively impacted the company's ability to continue to support its borrowing collateralized by its high-quality mortgage securities portfolio."

The sale includes $20.5 billion in AAA-rated mortgage-backed securities. The sale reduced its mortgage asset portfolio to $36.4 billion as of Aug. 17, from $56.4 billion on June 30. The sale also reduced its reverse repurchase and commercial paper borrowings to $12.4 billion on Aug. 17, from $32.9 billion on June 30.

Thornburg, a Santa Fe, N.M.-based mortgage company, said in the statement that it intends to reopen its loan lock desk to gradually begin locking loans for clients.

The GAAP book value has continued to decline over the past week, the Thornburg statement said, as market conditions have deteriorated. Now the GAAP book value is estimated as $12.40 per share, including an estimated unrealized market value loss of $2.42 per share, compared to $14.28 per share on Aug. 13.

"Over the past 14 years, our excellent credit quality portfolio combined with our liquidity and leveraged policy limitations have proven to be more than sufficient to allow us to support our borrowing requirements even during some of the most difficult financial markets, such as 1994 and 1998," said Thornburg's chief operating officer Larry Goldstone, in the statement.

"However, this mortgage financing market has been even more disruptive than either of those previous two periods for both the industry and Thornburg Mortgage. That said, we have now greatly reduced our exposure to continued widening of the spread between our mortgage assets and our hedging instruments and the associated margin calls against our collateralized borrowings and hedging instruments. As a result, we have nearly stabilized our liquidity situations, which we expect will allow us to begin to resume normal operations over the next two weeks as a leading residential mortgage portfolio lender in the high-quality jumbo and super-jumbo adjustable-rate mortgage market."

Thornburg's stock gave up 10.24%, or $1.54, to close at $13.50 on Monday, losing another 25 cents after hours (NYSE: TMA).

KKR's $230 million PIPE

Elsewhere, KKR Financial Holdings LLC said it is conducting a $230.4 million private placement of its stock and will conduct a public rights offering for up to $270 million to its existing shareholders.

"It's a great move for them," said one sell-side trader on Monday afternoon of the PIPE. "They're handling their liquidity problems in a reasonable way. It shows they have some modicum of control over the situation."

The offering includes 16 million shares at $14.40 apiece.

KKR also will offer a $270 million rights offering at the same price as the PIPE. The share price for both the rights offering and the PIPE is on par with the company's closing stock price on Friday.

The rights offering is guaranteed by the company's principals for up to $100 million, assuming the shareholders do not fund up to $100 million of the offering.

In a conference call held Monday, KKR's chief executive officer Nino Fanlo called the group of institutional investors involved in the offering "thoughtful, savvy investors who carefully consider the market."

"Given the market conditions, we have organized a group of institutional investors who both know KFN and market conditions to invest $230.4 million," Fanlo said during the conference call. The offering was significantly oversubscribed."

Citigroup is the placement agent.

KKR's stock gained $1.25 to close at $15.65 (NYSE: KFN).

KKR is a San Francisco-based holding company for mortgage-lending companies.

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