Thornburg Mortgage maneuvers for time with repo lenders close at hand

By Paul A. Harris

St. Louis, Oct. 7 - Last St. Patrick's Day, March 17, 2008, Thornburg Mortgage Inc. struck an override agreement with five of its reverse repurchase agreement lenders and bought some time: No margin calls for 364 days.

However that agreement fell apart in mid-August when Fitch Ratings downgraded the company's issuer default rating to CCC from BB, its senior unsecured notes to CCC- from BB, its unsecured subordinated notes to CC from BB- and its preferred stock CC from B+.

With the Fitch action, the margin calls resumed, according to a source familiar with the matter.

And with the resumption of the margin calls, the company found itself in a kind of Catch-22: the repo lenders' calls deprive the company of the cash it needs in order to execute provisions of the override agreement with the repo lenders, according to the source, who agreed to speak on background.

The repo lenders 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.

Together they own about $6 billion of Thornburg's securities.

Must raise $1 billion

The key provision in the override agreement called upon Thornburg to raise $1 billion of capital, which it first attempted to do in mid-March with a $1 billion public offering of convertible senior subordinated notes.

That attempt failed.

Then at the end of March the company privately placed $1.35 billion of 18% senior secured subordinated notes due March 31, 2015, with warrants for up to 48% of Thornburg's common stock.

As part of the override deal, Thornburg put $200 million of the proceeds into an escrow account earmarked to fund a tender offer for its four outstanding series of preferred stock, and complete that tender for 66 2/3% of each of the series: the 8% series C cumulative redeemable stock, the series D adjusting-rate cumulative redeemable, the 7½% series E cumulative convertible redeemable and the 10% series F cumulative convertible redeemable.

That process is ongoing

The company also had to obtain an authorization to issue 4 billion additional shares of common stock, which it obtained on June 12.

If that tender does not happen, a principal participation agreement is triggered whereby the notes will continue to pay 18% interest, instead of being lowered to 12%.

In addition, the bondholders will be able to take 20% of interest and principal from Thornburg's reverse repurchase agreement books, starting in March 2009.

A few hoops

Because the margin calls resumed in August, the company lacked the cash to make a Sept. 30 interest payment on the 18% senior subordinated secured notes.

On Oct. 1 Thornburg said it received consents from holders of 98.5% of its senior subordinated secured notes to make the payment due Sept. 30 in kind rather than cash.

In return for the consents, Thornburg will pay a fee of 6.5217 shares (after giving effect to a one-for-10 reverse stock split on Sept. 26) per $1,000 principal amount or additional notes.

The margin calls also made it necessary for the company to withdraw the cash part of the tender for the preferreds - an offer that it has now extended eight times.

Preferred holders who tender will now receive three shares of common stock for each preferred. Previously, holders were slated to receive $5 in cash and 3.5 shares for each preferred. The new payment reflects the one-for-10 reverse stock split that occurred on Sept. 26.

It became necessary for Thornburg to withdraw the cash from the offer when margin calls resumed nearly half a year before they were expected, according to the source, who added that Maryland law specifies that the company must demonstrate that its assets exceed its liabilities.

The company could not have met that test had it attempted to simultaneously satisfy both the repo lenders' new margin call and the interest payments to bondholders.

Had the company not received consents from 98.5% of the holders of the 18% senior subordinated secured notes due 2015, Thornburg would have found itself in default under Maryland law, according to the source.

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