Thornburg completes $1.35 billion note sale

New York, March 31 - Thornburg Mortgage, Inc. said it completed its $1.35 billion sale of senior subordinated secured notes.

The company received $1.15 billion of proceeds. The remaining $200 million is being held in escrow and will be delivered on successful completion of a tender offer for Thornburg's preferred stock.

The new notes mature on March 31, 2015 and have an annual interest rate of 18%, which will be adjusted to 12% upon shareholder approval of an increase in the number of authorized shares of capital stock that the company may issue to 4 billion shares and the successful completion of a tender offer for its preferred stock.

Investors also received initial detachable warrants to purchase common stock, exercisable at $0.01 per share. In total the warrants cover 39.6% of the currently outstanding fully diluted shares of the company.

The total purchase price for the $1.15 billion of notes and the warrants was $1.05 billion.

In addition, the company and the investors entered into a seven-year principal participation agreement. The investors paid Thornburg $100 million and in return will receive monthly payments equal to the principal payments received on the company's portfolio of mortgage securities and other assets constituting collateral under the override agreement with its repurchase agreement lenders announced on March 19, less the financing costs.

The payments will run from the March 16, 2009 expiration date of the override agreement through March 31, 2015. At that maturity date, the investors will receive the mark-to-market valuation of the collateral after deducting the then outstanding balances of the financing agreements for the collateral.

The principal participation agreement may be terminated before seven years at Thornburg's option if shareholders vote to increase the number of authorized shares, Thornburg buys at least 90% of its outstanding preferred stock in a tender offer and issues additional warrants.

If those conditions are met, the investors in the principal participation agreement and those that subscribed to the escrow fund will receive additional warrants. Combined with the warrants for 39.6% of the equity issued with the notes, the additional warrants will be exercisable for 87.8% of the fully diluted equity of the company after giving effect to the issuance of warrants to purchase 5% of the company's common stock on a fully diluted basis in the tender offer and all anti-dilution adjustments under all existing instruments and agreements.

Upon the occurrence of these events, the investors will receive up to an additional $200 million aggregate principal amount of senior subordinated secured notes and related detachable warrants to the extent that the escrowed funds are used to fund the tender offer and the annual interest payable on the notes will decrease to 12%.

Proceeds from the note placement will be used to satisfy outstanding margin calls owed to Thornburg's reverse repurchase agreement counterparties, a key contingency of the override agreement announced on March 19.

Thornburg will conduct a tender offer for all of its outstanding preferred stock at a price of $5 per $25 of liquidation value, plus, upon shareholder approval of additional authorized shares, warrants to purchase an aggregate of 5% of the company's common stock outstanding on a fully diluted basis or, if shareholder approval is not obtained, alternative consideration.

To the extent that the escrowed funds are not used to purchase the preferred shares that are tendered, unused escrow funds will be returned to the investors.

Thornburg has suspended dividend payments on all outstanding series of preferred stock.

The company is required to seek shareholder approval to amend the company's charter to increase the number of shares it is authorized to issue. The company will hold its annual shareholder meeting as promptly as practicable, but no later than June 15.

Upon completion of all of the transactions, common shareholders will hold approximately 5.5% of the common stock.

Thornburg earlier said it received an extension through March 31 of the override agreement under which the company agreed to raise at least $948 million in new capital.

The agreement was previously set to expire at 5 p.m. ET on March 28.

As previously reported, under the 364-day agreement, which was announced on March 19, Thornburg originally agreed to raise the new capital net proceeds within seven days.

The reverse repurchase agreement counterparties and affiliates who entered the override agreement include Bear Stearns Investment Products Inc., Citigroup Global Markets Ltd., Credit Suisse Securities (USA) LLC, Credit Suisse International, Greenwich Capital Markets Inc., Greenwich Capital Derivatives, Royal Bank of Scotland plc and UBS Securities LLC.

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

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