Moody's cuts Thornburg Mortgage senior debt to Ba2

Moody's Investors Service said it has lowered its rating on the senior unsecured debt of Thornburg Mortgage Inc. to Ba2 from Ba1.

The outlook is negative.

Moody's said the rating action reflects Moody's expectation that Thornburg Mortgage will pursue a more aggressive leverage strategy. According to Moody's, the likely trend in leverage at Thornburg Mortgage will be higher than the rating agency had anticipated, and that this was the main factor driving the REIT's rating change.

Incorporated in the rating action is the fact that Thornburg is shifting its funding of its growing asset base with non-recourse, on-balance-sheet securitization structures, such as collateralized debt obligations. These funding structures provide Thornburg Mortgage with long-term financing, which mitigates the REIT's funding risks associated with uncommitted short-term reverse repurchase agreement funding that the REIT has historically relied on.

In addition, such new funding also locks in the amount of capital the REIT needs to pledge; with repo funding, margin requirements can shift and cause funding disruptions.

In Moody's opinion, this reduction in funding risk, better control over potential shifts in margin requirements by secured lenders and funding diversification provided by collateralized debt obligations generate important benefits to Thornburg Mortgage.

However, these benefits do not offset the risks of likely increasing leverage the REIT will take on, partly stemming from this funding shift.

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