Back From One-Month Vacation, Analyst Downgrades Thornburg

An analyst from Friedman Billings downgraded Thornburg Mortgage yesterday to Underperform from Outperform. He claimed that the recent capital raise and related transactions result in 95% dilution and questions how shares will trade when 2.9 billion restricted common shares are registered and start trading mid-May. I have to wonder if this guy just got back from a one month vacation and found Thornburg's one-month old 8-K in his inbox. I am not a professional analyst, and yet it took me about 15 minutes to read and dispense an opinion on Thornburg's private placement released on March 25th. The dilution problem was clearly outlined when the company was attempting to raise the money it needed to stay alive. Did it really take this guy a month of analysis to come to the conclusion that the stock just might "underperform" when an additional 2.9 BILLION shares are issued? Can his abacus not count that high?
What is truly astonishing about this downgrade is the number of opportunities the analyst chose to ignore to decide the company was in trouble. For example, when Thornburg's repo lenders issued margin calls that the company couldn't meet, was that not a clue that it might not be outperforming its peers? Or when the company attempted to raise a convertible with a 12% interest rate that investors wouldn't touch, did that not raise a red flag? Or perhaps it may have been appropriate to downgrade the stock when the actual announcement was made about the $1.35 billion private placement that paid an 18% coupon and came with detachable warrants of a gagillion shares of stock issued at a penny? Thornburg didn't even outperform the other high-profile near-bankruptcy of Bear Stearns. Given all of the people currently getting laid off on Wall Street, how does this clown still have a job?

Some Good News and Some Bad News...

Lehman had no trouble selling its convertible preferred stock. They opted to raise $4 billion instead of the initial $3 billion due to excessive demand for the issue. According to the press release, the convertible preferred will pay 7.25% and will be convertible at any time into 20.0509 shares of Lehman's common stock, which represents an initial conversion price of approximately $49.87. The market likes this news as Lehman is up $3 in pre-market trading. While this should help squash rumors of liquidity problems at Lehman, it makes me wonder why they would borrow 7.25% money when they can get unlimited amounts from the discount window at 2.5%? But they don't call me a skeptic for nothing.
Thornburg managed to price the $1.35 billion it promised to raise to meet margin calls to its other lenders. This is actually only marginally good news. While the money will help the company stave off bankruptcy, it will cause the common shareholders to end up owning only around 5% of the company. So instead of paying $1.5 for the stock, you'd probably have to pay me to buy it.
That is most of the good news I see. In the bad news department, UBS will take a $19 billion write-down and can its CEO. Meanwhile,Deutsche Bank is writing down $3.9 billion and stating that "conditions have become significantly more challenging during the last few weeks." Futures are up so the market is back on "the crisis is over" mode. We'll see how long it lasts this time...

Citi Defends Lehman, TSLF a success, No News Out of TMA

An analyst at Citi upgraded Lehman this morning. Just to show how much stock investors put into analyst upgrades from banks that are having their own issues, Lehman's stock reacted with a resounding $.35 rally on the news. I don't have a clue what is going on at Lehman or if any of the liquidity rumors are true. The options market seems to believe them. And given how rumors can become a self-fulfilling prophecy, I'd be very nervous about betting against them.
The TSLF auction seemed to go well yesterday indicating that the pressures in the money markets may not be as bad as everyone believed. The stock market reacted with a sell-off in financials, which I found somewhat perplexing.
We're still waiting for news on whether TMA is going to make it. No announcements were made on the results of the private placement, so I'm guessing it's not going to happen. In any event, I still contend that private placement or no private placement, owning the common stock is a bad idea.

What Matters Today

In my opinion, two very important indicators of the problems in the credit markets will be released today. The Fed will initiate its TSLF, a 28-day swap of treasuries for MBS. The results of this auction will be extremely important as it will illustrate the severity of the financing problems of the banks over quarter end. The Fed is set to auction $75 billion. If the auction is a success, this is very good news for the fixed income markets and spreads should tighten between treasuries and agency mortgages, because it will be an indication that the Fed has the firepower to control the problem. If the auction is not a success and spreads in the repo market remain wide due to hoarding of treasuries out of fear, it is an indication that the problem is too big for the Fed to fix. I will be waiting for the results to be announced and will hopefully be able to interpret them. If the news in the money markets is bad, I don't believe that the financials can rally.
The other bit of important news should be an update on the situation surrounding Thornburg (TMA, which I have covered extensively in earlier posts.) Although some may wonder why the future of a nearly bankrupt mortgage REIT matters, I believe it is a very important indicator of market psychology. If TMA cannot raise $700 million for the balance of the private placement (yielding 18% and offering the purchasers 48% of the equity at $.01) then the repo lenders will be forced to seize the assets of the company and liquidate. Again, the last thing any bank or broker needs right now is more assets, particularly over quarter end. Furthermore, these assets are alt-a mortgages which face the prospect of deteriorating significantly if the housing market worsens (which appears inevitable.) If these two important events fail today, I think the market could sell off significantly. Otherwise, maybe I'll start to believe all those pundits last weekend who came out and announced that we'd seen the bottom.

Update on Thornburg

TMA has scrapped its initial plans to raise cash through a convert with a 12% interest rate and .75 conversion price. Instead it will offer $1.35 billion of debt paying 18% and offering warrants at .01 a share. So, this deal is significantly worse than the terms they initially sought. According to Bloomberg, a new investor MaitlinPatterson Global Opportunities Partners III has agreed to buy $450 million of the notes. Apparently, there will be a tender offer for 90% of the preferred stock plus warrants equal to 5% of the common shares. Although I fully admit to not being an expert on these types of deals, this sounds horrible for the common stock and I am amazed that it has rallied on the news. But maybe someone with a more sophisticated understanding can explain it to me. I'm waiting...

Speaking of Alt-A...

Holy Mother of Dilution! TMA (remember them? nearly bankrupt alt-a lender) just outlined its plan to stay in business and it is UGLY. Apparently, it has secured a one-year reverse repo from 5 counterparties (the nearly bankrupt BSC, C, CSFB, Greemwich, RBS, IBS) who have agreed to provide $5.8 billion in financing in return for warrants to purchase 47 million shares for $.01. Yes, I did say a penny. This represents 27% of outstanding shares. ADDITIONALLY, TMA has to raise $1 billion, which they plan to do by issuing a convert that pays 12% and has a conversion rate of $.75 a share. They will use the proceeds to pay margin calls. Translation? TMA is toast!

TMA

A Few Comments Before Vacation...

Bear Stearns upgrades Thornburg!  Of all the rumors circulating around, these two come up on the list of most likely to go bankrupt before march options expiration.  I'm sure that Bear Stearns wishes it could upgrade itself, but upgrading Thornburg may be its best second option.  

According to the credit markets section of the Wall Street Journal, the Fed's announcement did very little to improve liquidity in the repo market for anything other than treasuries.  Spreads in the bond market did come in a bit, which is good news, but are still at pretty wide levels.  I'm not sure what they are doing today because my "inside source" is also on vacation!  The big question is, can we make it until March 27th, when the Fed's new program will begin?  Or is some other unexpected blow-up in the wings beforehand?  If spreads start to narrow significantly, I'd guess FNMA and FRE would be a good bet to own.  Why FNMA and FRE and not the brokers?  Because they take just as much risk as the brokers but have a government guarantee!

I'll be out the rest of the week.  Enjoy the markets!  Thanks to all of my loyal supporters (all three of you!)