By request, here is a link to Thornburg's prospectus supplement that was the source of much of the information in this post.
Thornburg Mortgage (TMA) is not out of the woods yet. After the market close today, Thornburg announced surprising concurrent equity offerings - a combination of 4,500,000 shares of its Series F Preferred Series and 11,000,000 shares of common stock. Although neither deal has yet to price, the two deals could be expected to raise approximately $200 million in fresh capital for Thornburg.
With Thornburg's common stock trading under $9/share, surely the deal would be dilutive to book value, right? Not necessarily. In the accompanying prospectus, Thornburg disclosed that book value per share of common stock has fallen to an estimated $9.29 per (pre-offering) share at November 30, 2007, down from $10.14 book value per share of common stock as of September 30, 2007. TMA believes that about 70% of that change is attributable to declines on hedges as a result of falling net yields on its swap agreements, while the remaining 30% is due to valuation adjustments on the ARM securities portfolio. According to Thornburg, the trend continued through December, though more heavily weighted towards mark-to-market writedowns. Based on a preliminary review, TMA believes it had an additional $110 million in writedown exposure and $14 million in swap declines during December.
From a liquidity perspective, TMA's position "materially" declined from September 30 to the end of the year due to additional margin calls and changes in margin requirements. The Company cannot access commercial paper nor has it been able to issue any collateralized mortgage debt since October. Although TMA is able to rely on structured and committed reverse repurchase lines for now, this type of financing is much more expensive than securitized borrowings or standard repurchase lines. To prevent another round of forced asset sales, Thornburg has no choice but to turn to the equity markets once again to stay afloat.
6 comments:
Hey Pat, what's not to like about adding to the portfolio at a discount in this environment? TMA has the luxury to do so.
The prospectus states that "We intend to use the majority of the net proceeds of this offering to finance the acquisition or origination of additional ARM Assets. We will use the remainder of the proceeds for liquidity needs and for working capital, which may include the repayment of maturing obligations."
Basically, TMA is tapping the equity market to fund the renewal of the portfolio, since the spread between portfolio growth and runoff has narrowed significantly.
The problem is that TMA is not able to profitably finance additions to the portfolio if it has to use expensive repo lines.
What are their other options to grow the portfolio aside from taping lines of equity? Should they step away from the auction table at this time or finance it some other way?
The usual method of financing, and typically the cheapest, in mREIT land is to use warehouse lines of credit to fund the initial purchase or origination and then within 90-120 days, securitize the pool of mortgages. Unfortunately the securitization market is closed for business at this point. One other possibility might be to issue some unsecured notes, as iStar Financial has done. I'm not sure how receptive the market would be to that move at this point
-Securitization market closed
-Market not receptive to unsecured notes
Today was a strong day for mreits, do you think there's beginning to be a sense of urgency to buy up pools of loans at a discount by any means available? BTW, I'm not long or short TMA and I'm not looking to become either.
The mREITs did bounce on hopes of a rate cut (and the rumored Countrywide deal), but their ultimate performance is largely driven by demand for their private-label pools and MBS. There are some great deals out there right now, but few mREITs have the financing capacity available to purchase significantly.
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