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PF Nibbler Thornburg Mortgage (NYSE: TMA) announced last night that it had another margin call from its trading account, this time from JP Morgan Chase & Co (NYSE: JPM). The call was for approximately $28 million on a line $320 million.
The margin call is based on a series of short-term financing arrangements for its mortgage bonds--not its core capital, nor its loan operation, not its loan trust securities.
The use of the term “margin call” in this context is different from its use in a stock-trading account. Thornburg doesn’t buy its mortgages on margin, but rather through the use of reverse repurchase agreements.
Reverse repos are contracts with banks and other financials through which Thornburg sells bonds and then agrees to repurchase at a set time at a set price. The difference in price reflects implied interest paid by Thornburg.
This is a common form of finance that nearly every financial and major bank uses; vehicles include US government bonds, corporate paper and mortgages.
The latest call comes as the mortgage bonds (separate from its core assets) have been falling in price, not because of defaults or nonperformance, but simply because of market forces. Mortgage rates have been climbing over the past several weeks and are likely to continue to do so. This--on top of other factors including prepayment speeds and credit qualities--can impact mortgage bond values negatively.
Earlier this week, Thornburg established another traditional loan based on core assets to replace another reverse repo line. The amount was well in excess of that line, as Thornburg was planning to replace other repo lines, including JP Morgan’s. We detailed this transaction in a March 3 Market Update.
The so-called after-hours market, where the big guys get to trade, sent Thornburg shares down even further last night, to below 2. In this morning’s trading, the shares are now around 1.30.
Yes, this is terrible. The market’s reaction to the news--whether real or hyped--has been to send the shares to near extinction. And now some folks are speculating about Chapter 11 bankruptcy proceedings.
News bites don’t mention that Thornburg still has a book value of more than $8 per common share. And they don’t mention that these refinancings are getting done with little drama. Nor do they mention the core assets of the company, which continue to perform extremely well, with near-microscopic default rates.
We could have and should have sold Thornburg back in August. And we could have and should have sold it earlier in 2007 when the bottom end of the overall mortgage market began to show signs of weakness.
But we looked at the company and the market, much like Thornburg’s management did. The company had great credit, great assets, and not a hint of trouble with its mortgages. Management also saw a great opportunity to pick off their lesser peers and to gain further ground in a depressed market.
Unfortunately, the market hasn’t taken the time to study Thornburg’s assets and liabilities. Nor has it looked at revenues and the company’s market operations.
Instead, rumor and innuendo rules, as it continues to do against more and more companies’ stocks in this and many other market sectors.
It could go to bankruptcy, if only because creditors will want to take advantage of the protection to capitalize on Thornburg’s heavy assets. Or Thornburg may continue to operate on a smaller scale, running its successful core mortgage origination and servicing business.
With the common stock sitting at a buck and change, why should we sell? If it’s all gone, it’s gone. We’ve lost much more than that last dollar. By continuing to own Thornburg, we can still participate in the company’s assets if there’s a workout.
This is a real loss, and we know that many of you have lost significant dollars. We downgraded Thornburg from a Cash Cow to a speculative Nibbler last summer, and it remains on watch. If there’s a turn, we’d be enthusiastic about buying it--especially at a buck a share. Hold Thornburg Mortgage.
Note that management, including Garrett Thornburg and Larry Goldstone, has millions of shares personally invested in the company. So we’re not alone.
We’ll have further updates as warranted.