Thornburg Thrashed By Credit Market

Thornburg (TMA) finally posted Q3 earnings late yesterday, and once they did, it wasn't pretty. The company posted a GAAP loss of $8.83/share and worse, a taxable loss of $0.08/share. Since the taxable loss wiped out any remaining undistributed taxable income, Thornburg wisely suspended its dividend for the third quarter.

Some headlines from the earnings release:

• The company finally realized a small amount of loan losses during the quarter for the first time in five years.
• Book value fell to $10.14/share.
• The company now believes its REIT status will remain unaffected.
• The company is no longer acquiring pay option ARM assets from third parties, and stopped doing so in January 2007.
• Given the current mortgage rates offered by the company and its estimate of these financing costs, the company believes that it can achieve a 6.25% yield on its mortgage loans and a 30 to 40 basis point net spread leveraged approximately 27 times. This would translate into a return on equity before corporate operating expenses of approximately 14% to 17% on these originated and securitized mortgage loans. The company's goal is to acquire and securitize 70% of all new assets using this structure. Over time, this strategy will likely result in increased balance sheet leverage and continue to reduce the company's dependence on short-term financing sources.

Larry Goldstone, Thornburg's President and COO, noted that

Additionally, we still see credit availability and liquidity problems impacting financing for below AAA-rated asset classes. As of September 30, 2007, the company's portfolio consisted of 94.8% AAA-rated assets and 5.2% below AAA-rated assets. And while those portfolio assets continue to perform extremely well from a credit performance perspective, we have yet to see financing terms materially improve for these asset classes. Margin requirements remain high, financing spreads to LIBOR remain high and the number of finance counterparties for these asset classes remain limited. To date, the company has been successful in securing financing for its below AAA-rated assets, but it continues to pursue more permanent or predictable forms of financing, so as not to be subject to any further deterioration in future mortgage financing markets. Also, while the company has successfully obtained waivers of financial covenants from its warehouse lenders to be able to continue to fund its mortgage loans, the commercial paper market for financing AAA-rated securities remains closed to the company and the company remains concerned about the impact of 'structured investment vehicles' for which financing remains uncertain.

It was a horrible quarter for Thornburg, but a true testament to the acumen and ability of Thornburg management to survive an unprecedented dislocation in the the credit markets.