Thornburg lenders to stop margin calls

Mortgage group's lenders agree to stop issuing margin calls in exchange for capital.

March 19, 2008: 10:47 AM EDT

SANTA FE, N.M. (AP) -- Thornburg Mortgage Inc. will give away a big stake in itself and borrow $1 billion at a high interest rate to appease its lenders, the mortgage company said Wednesday.

The struggling company's lenders agreed to stop issuing "margin calls," or demanding their money back, if Thornburg raises enough cash. Thornburg has repaid lenders $1.2 billion and still faces more than $500 million in margin calls.

Thornburg Mortgage (TMA) owns a $35.2 billion portfolio of mortgage debt, mostly bonds backed by home loans carrying good credit.

The company typically pledges these bonds as collateral to borrow money. Because the tumult in credit markets has hammered the value of Thornburg Mortgage's portfolio, many lenders have tried to obtain their money back, forcing the company to sell investments at distressed prices.

In a bid to stem this cascade, Thornburg Mortgage reached a deal with its lenders, including Bear Stearns (BSC, Fortune 500), Citigroup (C, Fortune 500), Credit Suisse, Greenwich Capital, RBS (RBS) and UBS (UBS).

Thornburg will grant its lenders options to buy 47 million shares, or more than a quarter of the company's stock, at a penny per share.

The company will also pay off $680 million in debt, in addition to $500 million already paid off.

Thornburg will sell $1 billion in bonds bearing an interest rate of 12%. These bonds can be converted to Thornburg stock at a rate of 75 cents per share. The investors who buy these bonds will also be entitled to buy Thornburg stock representing 5% of outstanding shares at a penny per share.

Thornburg will suspend its dividend, maintain a $350 million "liquidity fund," and allow lenders to collect some of the payments on the bonds held as collateral.

If Thornburg meets these conditions, its lenders will grant a one-year reprieve from margin calls, which the company hopes can give it enough time to manage through what Chief Executive Larry Goldstone called "this highly volatile and uncertain mortgage market environment."

Throughout the mortgage crisis, Thornburg has insisted that the market was blindly grouping the company's high-quality debt with the low-grade home loans that have become toxic to investors.

Although the deal will water down the value of the stock shareholders currently own, Goldstone said it will give the company the liquidity and staying power to remain afloat.

Thornburg's stock, which has plummeted 90% in the past year, lost 91 cents, or 30.5% , to $2.07 in morning trading Wednesday.