Hedge Fund Buys into Thornburg Mortgage (TMA)

I am almost tempted to add to the tiny position into Thornburg Mortgage (TMA) on this news... but I'd rather see signs of recovery and buy up at $4 rather than $1.50. But all things considered this is relatively (relatively being the key word i.e. relative to bankruptcy) encouraging. The terms are quite horrific (dilution is enormous) but again, the alternative is being out of business. And if it makes it through this crater, and gets back on it's feet this could be a very interesting stock for later in 2008 or 2009.

• In a last-ditch effort Thornburg Mortgage seems to have figured out a plan to raise cash and avoid bankruptcy.
• Shares of Thornburg Mortgage (nyse: TMA - news - people ) jumped 36.4%, or 46 cents, to $1.73, at the close on Tuesday, after the company said it will commence a private placement of up to $1.4 billion of seven-year senior subordinated secured notes with an interest rate of 18.0%, which could be knocked down to 12.0% if the company is able to buy in most of its preferred stock at a fifth of its face value.
• In the new issue, distressed securities specialist MatlinPatterson Global Opportunities Partners will pick up $450 million worth of the notes, which will be secured by Thornburg's mortgage-backed securities inventory.
• Tuesday's announcement comes in the wake Thornburg's announcement Monday night that it had amended its bylaws to allow an investor to acquire up to $300 million worth of stock in conjunction with the company's offering of $1 billion of convertible debt.
• Although Tuesday's deal keeps the Santa Fe-based firm out of bankruptcy, it comes with a high cost. For one, Thornburg is selling the purchaser of the notes warrants that will allow them to buy 48% of the company for a penny per share.
• The dilution of stock makes the current shareholders' equity worth nearly nothing, Bose George, an analyst at Keefe, Bruyette & Woods, told the Associated Press, though he added there were no real alternatives. "If the deal doesn't go through, lenders will liquidate the company, so shareholders presumably would end up with nothing," he said.
• They may end up with nearly nothing anyway. The agreement with creditors, under which Thornburg was required to raise capital in the bond market, has what seem to be onerous terms. Thornburg can get out of that seven-year pact early by issuing even more warrants, which would leave the current shareholders with just 10% of the company.
• Shares in Thornburg, whose problems stem from a distaste among investors for mortgage-related assets, traded as high as $28.40 last year. The company specialized in jumbo mortgages, those too large to be securitized by the government-sponsored Fannie Mae and Freddie Mac. As a result of the subprime mortgage crisis, Thornburg's portfolio of adjustable-rate jumbo mortgages lost value, and lenders issued margin calls that it was unable to meet.

Long Thornburg Mortgage in fund; no personal position