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Monday, Aug. 13, 2007
This section was last updated at 6:00 pm.
Thornburg Mortgage (NYSE: TMA), Thornburg 8 Percent Preferred C (NYSE: TMA C) and the Thornburg Mortgage 8 Percent Notes of 05/15/13 have taken quite a few hits lately.
Is something changing with Thornburg Mortgage to cause yet another wave of sellers and short-sellers in the common stock as well as the preferred shares and bonds taking another heavy hit?
Yes. Two things.
First, over the weekend you couldn’t read or listen to any financial news or commentary that didn’t point out the woes in the mortgage industry and the key industry leaders’ troubles. This also was fueled specifically in the case of Thornburg as Moody’s (NYSE: MDY) and Standard & Poor’s (S&P), a division of the McGraw-Hill Companies (NYSE: MHP), went through their catch-up to market expectations that the company should be placed on credit watch and downgraded.
In the case of S&P, the company went from having Thornburg on credit watch for an upgrade with positive sentiment on behalf of S&P researchers to an outright negative rating all in a matter of one report.
All of this, in our opinion, led to many folks getting online or calling their brokers with the order to bail on or short Thornburg at the open in Monday’s trading session.
The second issue is that the market for extending credit lines as well as maintaining existing credit lines for nearly any mortgage company has been drying up even more dramatically during the past few days.
This means that any lender--whether local banks or mortgage companies or others that are originating mortgage loans and then either holding or selling them--are increasingly being viewed as very vulnerable.
We’ve been writing about this major issue for the past few weeks. It’s becoming a moot question as to the financial and/or business health of companies when it comes to credit. Instead, everybody’s getting tarred by the same brush, resulting in a real and perhaps worsening squeeze.
In addition, even if companies are solid with current funding sources, both in the bond market as well as with bank and other credit lines, it doesn’t have to mean that their stocks will reflect the health of the company and its business. Sellers are just selling and getting out or shorting trying to make a buck betting on more market woes.
We’ve gone through the Thornburg statements including its more recent disclosures on the quality of their mortgage holdings. As we’ve written during the past week, the underlying portfolio of mortgages has an average FICO credit score in the mid-740 range with a delinquency rate less than one-tenth of 1 percent and the defaults or troubled mortgages have been reported to be only 58-60 out of more than 36,000 loans held by Thornburg.
It never did any subprime lending or any other odd-ball low-end deals. Instead, for years the company has focused on high-quality borrowers in specific markets using adjustable rate loans.
It’s financing is via its equity capital of its common stock, which management has been buying with its own cash even during the past couple weeks by hundreds of thousands of shares. In addition, Thornburg has preferred issues including the 8 percent trading on the New York Stock Exchange.
And the rest is done via bank and other corporate funding. In addition, Thornburg also deals in the secondary market for mortgages buying, selling and investing in the market. And it’s done so very successfully in all interest rate environments including major bond market shakeups such as in the early ‘90s as well as ‘98, ‘01 and the current market.
So, what are the risks for Thornburg?
It could have issues keeping its funding and trading lines with other banks, investment companies and brokerages. It could stop originating new mortgages and simply sit with its own current portfolio.
In both cases, the result would be that revenues would continue to flow but at a lower growth rate or even a contraction of its business. This would then result in lower net revenues and a lower dividend payout.
Management hasn’t returned our most recent queries, which isn’t an issue on the surface as it’s been a very busy time for the company. We’ve asked for more specific information concerning its current cash and capital conditions as well as a near-term outlook. We expect to hear more from it as it will need to address not just us but the rest of the market.
Meanwhile, some brokerage firms including Bear Stearns have joined others in being critical not of the company’s business but of the market. And if conditions continue, Thornburg may have to shrink its portfolio and its business, potentially putting up more capital or selling off some of its portfolio to do so.
It’s ironic that this firm, which imploded its own investors by billions in subprime mortgages is now becoming holier than thou when it comes to other mortgage investors, joining Moody’s and S&P that have been selling Aaa-AAA ratings for pooled mortgage-backed securities (MBS) and other collateralized debt obligations (CDOs) by others that went belly up.
So, it’s cover your ‘you know what’ time for them.
What should we do?
We have three choices right now. We can continue to buy more of the common shares and preferreds as well as the bonds of Thornburg operating under the proven formula and understanding that the company will do what it’s done for year--remain successful. This, of course, might mean even further losses over and above what we’ve already suffered.
We could simply sell out and wait for the dust to settle and then come back in, saving further losses. But at the same time, we’d be foregoing the heavy dividend and interest payments in the coming months.
Or we can hold what we have and maintain a watch, keeping a firm eye on the market and the company.
Right now, we maintain a watch on Thornburg. This means that for now we aren’t recommending adding any more to current holdings until the market stabilizes and reality returns to the credit markets.
In addition, for those who own the common, preferred and/or bonds of Thornburg, only continue to hold what you can afford to see more potential losses. We don’t want any subscribers having any further pains that would place them in financial troubles.
In addition, for those looking at potentially recognizing some upside by betting on further industry and market woes, shorting corporate and mortgage bond insurance companies including MBIA (NYSE: MBI) and AMBAC (NYSE: ABK) as well as individual mortgage insurers such as Radian Group (NYSE: RDN) and The PMI Group (NYSE: PMI) and even one of the major bond houses engulfed up to their ears in mortgage and corporate loan pools and bonds such as Lehman Brothers (NYSE: LEH) might be worth looking at for those with speculative capital and the experience with this side of the stock market.
We will post more information as warranted and available on Thornburg and the industry and market over the coming days.
There was a large sigh of relief Monday as overseas central banks continued to pump liquidity into the market, easing last week’s turbulent losses at the start of the trading session. The European Central Bank (ECB) provided $65 billion in loans and the Bank of Japan allocated more than $5 billion.
Meanwhile, the New York Federal Reserve doled out $2 billion, significantly less than the $52 billion requested by several banks and other institutions. The $2 billion allotment was in the form of overnight purchase agreements and purchases of Treasurys and agency debt.
The added liquidity eased concerns regarding the credit crunch and helped traders build confidence in their investments, boosting stocks on the broader market throughout the day.
Goldman Sachs Group also helped eased worries after the company announced that it reinforced its troubled Global Equity Opportunities fund with a $3 billion investment.
But even that couldn’t erase subprime jitters as investors continue to worry about when the next subprime-related problem will hit and how hard the impact will be.
Following last week’s brutal volatility, US stocks smoothed out recent declines, gaining slightly before falling back into the red just ahead of the bell. The Dow Jones Industrial Average slipped 3.01 points, or 0.02 percent, to close at 13,236.53; the Nasdaq Composite shed 2.65 points, or 0.1 percent, to close at 2,542.24; and S&P 500 shrank 0.72 points, or 0.05 percent, to close at 1,452.92.
The Energy Dept reported a drop in gas and crude supplies, pushing crude oil futures up 15 cents to close at $71.62 a barrel following a zigzagging trading session. The commodity reached an intraday high of $73.19. As the summer driving season coasts to an end, the commodities market has remained rather moderate despite all the volatility in the broader market.
The US dollar saw some volatility in trading today, rising against a number of foreign currencies before falling as low as 117.68 yen intraday. The greenback flip flopped again before slipping slightly against the yen to 118.26, down from 118.46, and gained some steam against the euro, which fell to $1.3613 from $1.3701.
Gold futures dropped 70 cents to close at $680.90 an ounce as the US dollar gained against several foreign currencies intraday, pinching demand for the precious metal.
The yield on the 10-year Treasury note barely moved, gaining a mere 0.02 of a percentage point to close at 4.78 percent.
11:26 am
Longtime Cash Cow Thornburg Mortgage (NYSE: TMA) is continuing to get hammered, as it’s off by about 12 percent so far this morning. As we’ve been saying all along, Thornburg is a strong company with a solid balance sheet, but it’s not immune to market forces.
With all the talk of credit crunches and subprime woes, investors are jittery about anything with “mortgage” in the name. The company does not appear to be in any immediate danger since it doesn’t operate in the subprime arena, but folks just aren’t sure this is a market sector they want to be in right now.
As such, we believe that the main catalyst behind the action we’re seeing now is simply that investors have had the weekend to digest all of the news, so they put in their sell orders over the weekend to be executed this morning.
We’re seeing a bounce in their share price now, coming back from a low of about $15.00 earlier this morning, so maybe investors are regaining their senses. But for the time being, Thornburg remains on watch as we continue our analysis of the situation. We’ll have another update later this afternoon.