Thornburg continues to negotiate with reverse repurchase agreement lenders, look for stable financing

By Jennifer Lanning Drey

Portland, Ore., Nov. 12 - Thornburg Mortgage, Inc. continued to be troubled during the third quarter by unsuccessful negotiations with its override agreement lenders on how the company's ratings downgrades are to be treated under the agreement, Larry Goldstone, chief executive officer of Thornburg, said Wednesday.

"We continue to be hopeful that we are going to come up with some sort of a negotiated resolution and some sort of an agreement on how to behave on a go-forward basis," Goldstone said during Thornburg's third-quarter earnings conference call.

Responding to a question, the CEO later said Thornburg was prepared to litigate but believes it will be able to reach a resolution outside of court.

As of Sept. 30, $267.3 million of previously restricted cash was applied to the outstanding reverse repurchase agreement balances.

Third-quarter profit

Thornburg posted net income for the third quarter of $140 million, primarily due to decreases in the fair value of its principal participation agreement and additional warrant liability and the senior subordinated notes. Those factors were offset by a net loss on ARM assets.

Aside from the fair market value related income items, net interest income was $80 million, up from $53.3 million for the prior quarter.

"There is substantial core profitability in this portfolio, and our issues continue to reside in the ability to obtain financing for this balance sheet that is predictable and reliable," Goldstone said.

"If in fact we can achieve that stabilization of predictable and reliable financing, this company stands to be highly profitable on a core operating basis as we move forward."

Goldstone said arranging alternative financing for the period after the repurchase agreement expires is its top priority, although the current disagreement with the lenders has been a substantial distraction.

"We are looking at a myriad of ideas and different angles to get this book financed," he said.

Exchanging debt for equity

Also during the call, Goldstone noted that the company has been engaged in exchanging a portion of its senior subordinated notes for common equity in recent weeks and has retired roughly $25 million to $30 million of the notes.

However, the company agreed to discontinue exchanging debt for equity during the period around the planned Nov. 19 closing of its preferred stock tender, so the exchanges are on hold in the near term.

Once the tender is completed, the related additional warrants are issued and the company believes the stock price has settled, it will look at other options to exchange debt for equity, he said.

Preferred stock tender

A week away from the planned closing for its exchange offer and consent solicitation for four series of preferred stock, Goldstone said Thornburg is feeling "fairly confident" that it will finally be able to close the offer.

As of Nov. 3, the company had received the required tenders in three of the four preferred series and was about .5% shy in the series F preferred stock, he said.

The company has repeatedly said completing the tender offer is a critical step in its plan to resume normalized business operations because it will reduce the interest rate on its senior subordinated secured notes due 2015 to 12% from 18%, which will greatly reduce the cash demands on the company.

Successful completion of the exchange offer will also result in the termination of the PPA, an agreement that provides to each investor who also purchased senior subordinated notes an interest in the then unpaid principal amount of a specific portfolio of mortgage-backed securities and rights under a number of agreements.

Loans sold, not securitized

Also during the third quarter, Thornburg completed the sale of $111.2 million in ARM loans at a loss of $13.2 million. The decision to sell the loans was made after the company was unable to complete a securitization transaction, as was previously planned.

Following the close of the quarter, Thornburg entered into an agreement to sell another $92.2 million of loans. Upon settlement, expected within the next week, Thornburg expects to completely pay off its warehouse financing with the proceeds.

Thornburg is a Santa Fe, N.M., lender specializing in jumbo mortgages.

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