Thornburg Raises $1.35 Billion to Avoid Bankruptcy

The New York Times

April 2, 2008 Wednesday
The New York Times on the Web

BYLINE: By REUTERS

SECTION: Section ; Column 0; Business/Financial Desk; Pg.

Thornburg Mortgage shares rose nearly 20 percent Tuesday after the company, which provides large residential mortgages, said it successfully raised $1.35 billion in a last-ditch effort to avoid bankruptcy.

In a statement late Monday, Thornburg said it sold subordinated secured notes with an initial 18 percent interest rate, warrants to buy common stock at 1 cent a share and a stake in some mortgage assets.

The company said it had received $1.15 billion of the proceeds and expected to receive the remaining $200 million after a tender offer for preferred stock.

''It should keep them out of bankruptcy,'' said Jason Arnold, an analyst at RBC Capital Markets in San Francisco. ''They gave away everything and the kitchen sink to get the deal done. Thornburg will have a lot of constraints on how it uses capital, and now has reputational challenges to overcome.''

Thornburg, based in Santa Fe, specializes in ''jumbo'' mortgages above $417,000, which have typically gone to buyers of more expensive homes who have good credit.

The company had long boasted of the credit quality of its $35.2 billion portfolio of adjustable-rate mortgages, but it proved vulnerable to tightening credit markets as investors stopped buying those home loans.

Until recently, jumbo mortgages were also too large to be acquired by Fannie Mae and Freddie Mac.

The terms of the offering were more costly to shareholders than Thornburg had estimated when it announced plans on March 25 to sell the notes, a Credit Suisse analyst, Moshe Orenbuch, wrote.

Existing shareholders are expected to retain just a 5.5 percent stake in the company. An earlier plan for Thornburg to raise $1 billion by selling convertible debt with a 12 percent interest rate failed.

New chapter in subprime saga

Former colleagues at lender Countrywide form new firm to buy and resell distressed mortgages

The Globe and Mail (Canada)
March 24, 2008 Monday

BYLINE: DIYA GULLAPALLI
SECTION: REPORT ON BUSINESS: THE WALL STREET JOURNAL; INVESTMENT COMPANIES; Pg. B5

For 27 years, former Countrywide Financial Corp. president Stanford Kurland made a fortune helping to build a mortgage lending empire.

Now, as the mortgage market collapses, Mr. Kurland and some former colleagues have a new plan - make another fortune on the way down.

Today, the group will announce the launch of Private National Mortgage Acceptance Company LLC, or PennyMac, an investment firm formed as a joint venture between asset manager BlackRock Inc., under chief executive officer Laurence Fink, and Boston investment firm Highfields Capital Management.

PennyMac seeks to raise more than $2-billion (U.S.) to buy distressed mortgages on the cheap, work with borrowers to restructure them, and then resell them as performing mortgages at a profit.

A number of bottom-fishers are already wading into the mortgage market, but PennyMac is taking a different approach from most. Rather than buying slices of mortgage-backed securities, which are claims to pools of mortgages, PennyMac plans to buy whole mortgage loans - the old-fashioned mortgages that banks routinely owned before the mortgage securitization business came along.

PennyMac executives believe that troubles with whole loans are the next big shoe to drop for the mortgage market, with a massive unwinding steadily under way. PennyMac executives figure that a lot of these mortgages will be sold at big discounts as banks and thrifts clean up their balance sheets.

PennyMac will operate from Calabasas, Calif., the hometown of Countrywide, the largest independent mortgage lender in the country.

While the two firms aren't related, PennyMac will be closely watched because it employs so many former Countrywide executives. Countrywide alumnus David Spector, who until most recently was co-head of the now-downsized global residential mortgages group at Morgan Stanley, will be chief investment officer.

Others leading the firm are James Furash, a former CEO of the Countrywide Bank unit, and Michael Muir, a former chief financial officer of the unit.

PennyMac's plan to profit from the mortgage industry's turmoil is likely to draw fire, especially from those who believe Countrywide's aggressive sales tactics and lowered lending standards helped lead to the subprime mortgage mess in the first place.

"The whole subprime mortgage fiasco was built on sort of Wall Street's snake-oil salesmen convincing America this is a can't-miss scheme," says Irv Acklesberg, a consumer lawyer in Philadelphia who testified to the Senate Banking Committee on lending last spring.

"It sounds like they've just morphed into some new version," Mr. Acklesberg said.

PennyMac executives disagree, saying many of them were involved in risk management while at Countrywide and its units and have little to do with the firm's recent problems.

"I don't think it's ironic; I think it's appropriate that experienced people are coming in" that have "the greatest capability and knowledge to revitalize the mortgage market," Mr. Kurland says.

A Countrywide spokesman declined to comment.

Mr. Kurland was approached by BlackRock's Mr. Fink a few months ago about the venture. The two have known each other since grade school in Van Nuys, Calif., and Mr. Kurland has been figuring out his next move since 2006 when he left Countrywide, where he was in line to become CEO after Angelo Mozilo.

The PennyMac approach could be risky, particularly if it dives in too early and purchases loans that continue to drop in price, or if the firm can't restructure the loans with terms that will ultimately lure buyers.

This could leave the firm holding the bag on troubled loans, ultimately leaving its investors with losses.

"I would say the greatest risk is a very deep and very elongated recession" without "a rebound of residential housing over a very long cycle," Mr. Fink says. While "we don't believe" that will happen, we're also not suggesting we know "the bubble is over or the bottom has been reached," he says.

Despite a rebound in the mortgage bond market in recent days amid major steps by the Federal Reserve to restore confidence, PennyMac expects further problems as $1-trillion in bank-held jumbo, subprime and other mortgages stand to become nonperforming. It thinks whole-loan losses have barely begun to materialize, and a new wave of defaults is coming as loans with low initial "teaser" rates reset to higher rates, squeezing borrowers' ability to pay.

Already, delinquency and foreclosure rates are reaching new highs by some measures, and are likely to get worse as home prices continue to fall, the economy slows, and unemployment rises.

Mortgage mountain

Government -sponsored enterprise securities: 41%

Loans primarily held through banks and thrifts: 36%

Private -label securities*: 20%

Other: 3%

*Asset-backed securities and collateralized debt obligations