Thornburg CEO says company's future relies on successful completion of preferred tender offer

By Jennifer Lanning Drey

Portland, Ore., June 12 - Thornburg Mortgage, Inc.'s top priority over the next few months will be to successfully complete a preferred stock tender offer that will allow the company to terminate the principal participation agreement entered into in connection with its March 31 senior subordinated note transaction, Larry Goldstone, chief executive officer of Thornburg, said Thursday during the company's first-quarter earnings conference call.

"The whole future of the company rides on this," Goldstone said during the question-and-answer session of the call.

Following his formal remarks, the CEO fielded a number of questions from investors asking him to expand upon the rationale behind the March 31 transaction and planned preferred tender offer being named as the company's best options.

Goldstone told stakeholders Thornburg believes it could be profitable over the balance of the year, if given the chance.

"The operating environment, while difficult from a portfolio financing perspective, is actually about as favorable as we've seen it in a long time from a yield curve and interest rate perspective," he said.

"Consequently, we do have some degree of optimism about where we might be able to go in the future here given the ability to continue to operate and deal with some of our financing and accounting issues."

'This was it'

As previously reported, Thornburg completed a $1.35 billion sale of senior subordinated notes on March 31. The company received $1.15 billion of proceeds while the remaining $200 million is being held in escrow and will be delivered on successful completion of the preferred tender offer.

As part of the transaction, Thornburg entered into a seven-year principal participation agreement, under which 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 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 preferreds in a tender offer and issues additional warrants.

"We're not happy about the transaction, but I can go to bed at night, and I know that we gave it our all. We turned over every rock; we looked at every possible transaction. I've got no qualms with where we ended up because I know what the market environment was like and what the constraints were like in that February/March timeframe, and I can assure you there was no alternative. This was it," he said during Thursday's call.

Steps to tender offer completion

Before Thornburg can market the preferred tender offer, the company needs shareholder approval to increase its authorized share count to 4 billion shares from 500 million. Additionally, common shareholders must agree to modify the terms of four series of outstanding preferreds.

Both items were scheduled for a vote at the company's annual shareholder meeting, scheduled for a few hours after the call.

If approved, Thornburg must then file an S-4 with the Securities and Exchange Commission, which will take up to 30 days for the SEC to review and an additional few weeks for the company's response.

Accordingly, Thornburg believes late September is the earliest timeframe for successful completion of the tender offer.

At the same time, however, the senior subordinated note transaction includes a deadline of June 30, and the company has requested that the participants in the escrow agreement extend the deadline to Sept. 30.

When asked why the escrow participants would be compelled to extend the deadline as opposed to keep it at June 30, Goldstone said, "The alternative is a much bigger return. As a going concern and an operating entity well capitalized outside of the override agreement with the ability to reinvest cash flows, this could be a 3, 4, 5 times return, so there is substantial motivation for them to play it out."

$3.31 billion quarterly loss

For the first quarter, Thornburg reported a net loss before preferred stock dividends of $3.31 billion, compared with net income of $75.0 million in the same period of the prior year.

The losses primarily resulted from an unrealized market value loss on its mortgage securities portfolio and securitized adjustable-rate mortgage loan portfolio of $1.54 billion.

Additionally, Thornburg recorded charges of $949.1 million in order to report the March 31 financing transaction at fair value.

Thornburg also recorded a $651.6 million unrealized loss related to the sale of assets, carried out in order to meet margin calls, and a $126.1 million unrealized loss related to the permanent financing of $1.7 billion of securitized ARM loans, which the company did to enhance its liquidity position.

Thornburg said it expects to file its form 10-Q with the SEC sometime early next week.

Hoping to restart loan originations

Also during the call, Goldstone said Thornburg had renegotiated its lines of credit with its warehouse lenders and has currently $400 million of committed capacity.

Following the renegotiations, which took place in April and May, Thornburg began funding its locked pipeline, and those loans are now set to be securitized, he said.

Once Thornburg files its 10-Q, the company expects to be in the market with a securitization transaction.

After the securitization is complete, the company hopes to begin pricing new loan products and taking new loan applications, Goldstone said.

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

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