Thornburg Mortgage Inc. (TMA) said yesterday (Tuesday) that it would raise $1.35 billion through a private-placement deal to help keep the company in business and avoid bankruptcy.

Thornburg, which caters to borrowers with strong credit, specializes in "jumbo" mortgages – loans that exceed $417,000. It avoided subprime loans, which have had the highest rates of default, but ran short on cash after falling home sales reduced demand and investors wary of mortgage-backed assets retreated from the company’s securities.

Until recently, Thornburg’s loans were too big to be purchased by Fannie Mae (FNM) and Freddie Mac (FRE).

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Thornberg has lost 95% of its value in the past year, and is desperately fighting to stay afloat. It needs approximately $1 billion this week to meet margin calls from bankers. A previous plan to raise about $1 billion in convertible notes with an interest rate of 12% failed and was subsequently terminated.

Having suspended its preferred dividends and offered to buy back 90% of its preferred stock, Thornburg is now seeking to raise $1.35 billion using debt that pays an 18% interest rate. If the New York Stock Exchange grants its approval, Thornburg will issue senior subordinated secured notes due in 2015 without shareholder approval, which the company says would take too long.

"Thornburg has a tight time window and you have to take measures you normally wouldn’t employ," Keith Gumbinger, vice president of HSH Associates, told Bloomberg. "An 18% yield attracts instant attention."

An infusion of fresh capital is the centerpiece of a recent agreement Thornburg struck with its creditors, who agreed to freeze their demands for more collateral, so long as the company can raise at least $948 million in seven business days. If this offer fails, and the company’s creditors withdraw from the agreement, Thornburg will likely be forced into bankruptcy. 

Thornburg also changed its bylaws to allow any single investor to acquire up to $300 million in company stock, so long as that the investor can guarantee its ownership would not jeopardize Thornburg’s status as a real estate investment trust, filings with the Securities and Exchange Commission showed.

Home Sales Up, Prices Down

Existing home sales in the United States rose in February for the first time since last July, after prices plummeted to record lows.

Purchases climbed 2.9% to an annual rate of 5.03 million, the National Association of Realtors reported. Despite the slight bounce in February, few analysts believe the housing market is anywhere close to recovery, as home prices continue to slide.

Existing home prices continued their decline, with the average home price falling from $213,500 in February 2007 to $195,900, an 8.2% drop and the largest monthly decline since 1968.
The S&P/Case Shiller home-price index plunged 10.7% in January from a year ago. It dropped 9% in December. The gauge, which surveys the home prices of 20 major metropolitan areas, has been in decline for 13 straight months.

"The real number of importance is the price," Gary Shilling, president of the investment advisory firm A. Gray Shilling & Co., told Reuters. Prices are declining and that’s wiping out the equity of many people. People are literally under water on their houses and are walking away."

Home foreclosure filings soared 60% and bank seizures more than doubled in February. 

News and Related Story Links:

• Bloomberg:
  Thornburg Offers $1.35 Billion of Debt Paying 18%

• Wall Street Journal:
  Thornburg Mortgage Aims To Raise $1.35 Billion

• New York Times:
  Home Prices and Consumer Sentiment Slide

• Reuters:
  Existing home sales post surprise rise

• Money Morning:
  Home Sales Rise While Prices Slide Most in 40 Years