Thornburg Mortgage Inc., which has faced insolvency and bankruptcy, detailed a timeline of its demise in a recent securities filing. While a rescue deal has been worked out, the company is still not out of the woods.
Thornburg’s problems began in August 2007, when the secondary market for adjustable-rate mortgage-backed securities and mortgage loans nearly collapsed, according to Proxy Statement filed with the Securities and Exchange Commission Monday.
“The mortgage industry is facing some of its most difficult years in the history of the industry,” the filing explained. “Residential real estate values have declined significantly throughout the United States and defaults and foreclosures are reaching historic highs.”
Faced with the difficult conditions, Thornburg sold $21.9 billion of its mortgage assets, paid down $21.4 billion in operating debt and terminated $44.0 billion of interest rate hedging instruments during the third quarter. The real estate investment trust also successfully raised $0.5 billion through a preferred-stock offering.
Thornburg briefly halted new business in August and suspended its dividend.
But by September, Thornburg appeared to be back on its feet — having securitized a $1.4 billion CDO and using most of the proceeds to pay down warehouse lines. The company reported a $1.08 billion third-quarter loss, however, and it faced a growing number of investor class actions lawsuits.
By December, the lender announced it would reinstate its dividend.
In January it announced it raised $212 million in concurrent public offerings of 7 million common stock shares and 8 million shares of its existing 10 percent Series F Cumulative Convertible Redeemable Preferred Stock.
By early February, the company said it had returned to profitability in the fourth quarter of 2007.
But on Feb. 14, 2008, MBS prices tumbled and liquidity dried up, pushing the value of Thornburg’s “high quality” MBS portfolio lower. As the Santa Fe, N.M.-based company faced growing margin calls and increases in required margins, finding financing became increasingly difficult.
On Feb. 15, Thornburg was hit with a margin call on $2.9 billion in AAA-rated super-senior credit-enhanced MBS backed by Alt-A mortgages. The margin call was issued despite no credit losses being realized on the securities.
Thornburg was able to meet $300 million in margin calls from some of its reverse repurchase agreements but faced another $270 million in margin calls on Feb. 27. — more than it was capable of meeting. The next day, JPMorgan Chase Bank N.A. notified the REIT of a default on a $320 reverse repurchase agreement because it didn’t meet a $28 million margin call.
After that was Natixis Securities North America Inc., which on March 3 presented a notice of default on a $163 million facility after Thornburg missed a $6 million margin call. ING Financial Markets LLC followed with an NOD after the firm was unable to repurchase $70 million in AAA-rated securities on a $707 million facility.
Thornburg was able to complete a $1.0 billion collateralized-debt obligation on March 3, eliminating the possibility of margin calls on the prime hybrid ARMs backing the deal.
But margin calls continued to pile up, with Goldman, Sachs & Co. issuing an NOD after Thornburg missed a $54 million margin call on a $550 million reverse repurchase agreement.
By March 6, unpaid margin calls added up to $610 million, significantly exceeding available liquidity, despite having satisfied $1.2 billion in calls since December.
The situation took a turn for the worse on March 7 when Thornburg’s auditor, KPMG LLP, issued a letter indicating that 2006 and 2007 financial statements could no longer be relied upon.
“Difficult market conditions resulted in a significant deterioration in the prices of mortgage-backed collateral, which combined with a liquidity position under heavy pressure from increased margin calls by its reverse repurchase agreement lenders, a portion of which the company has been unable to meet,” Thornburg noted at the time, adding that the situation had raised substantial doubt about its ability to continue as a going concern.
Thornburg’s board of directors authorized a restatement, and amended 2007 financials were filed with the SEC on March 11 reflecting $677 million in impairment charges last year. The restatement came as Morgan Stanley & Co. Inc. issued a $9 million margin call on a $49 million reverse repurchase agreement.
The lender saw some relief with the $3.0 billion sale of more than 150 mostly AAA-rated MBS on March 13. Four days later, Thornburg reached an agreement with several reverse repurchase lenders to halt margin calls for one year if it could raise $1.0 billion in new capital within a week.
However, a $1 billion offering on March 19 failed to attract enough investor interest and was scrapped. The board was faced with considering alternatives that included bankruptcy.
But MatlinPatterson submitted a proposal on March 24 where it would serve as lead investor in a $1.35 billion private placement . The proposal was accepted the next day.
With a deal in hand, the reverse repurchase lenders gave Thornburg until March 31 to come up with the $1 billion, which it did.
An April 18 SEC filing indicated subsidiary Thornburg Mortgage Capital Resources LLC defaulted on $300 million in short-term notes due under its commercial paper program, prompting the collateral agent to begin liquidating the AAA-rated mortgage-backed securities backing the commercial paper. But the unit was structured to be “bankruptcy remote” from Thornburg Mortgage Inc.
Shareholders are now being asked to approve a highly dilutive increase in authorized shares to 4 billion from 500 million, three new directors and a charter amendment. The proposed plan leaves more for shareholders than other alternatives, according to the company.
“We are still navigating through these tough times, and, the financing transaction with MatlinPatterson and the other investors included conditions that we must meet in order for us to be put in a position to resume normalized business operations,” an SEC filing said. “Approval of the proposals in the proxy is necessary to meet some of those conditions and approval will help us rebuild our core business: originating and securitizing loans.”
Thornburg, which has notified the SEC it would not be able to file its first-quarter Form 10-Q on time, warned that if the plan is not approved by shareholders at the annual meeting on June 12, interest costs will be an additional $69 million. Also, the new investors will receive all of the principal repayments from loans backing a significant MBS portfolio.
The firm still faces an SEC investigations over the restatement of 2007 financials, margin calls and the valuation, impairment and disclosures of the accounting treatment of its MBS.
