US mortgage lender Thornburg has filed a material default notice with the SEC.
Thornburg’s share price crashed on Tuesday after speculation over margin calls hit the press.
The lender defaulted on a reverse repurchase agreement with JPMorgan on 28th February, after the bank made a $28m margin call. The repo with JPMorgan totalled $320m in size, all of which is being recalled:
JPMorgan will exercise its rights under the Agreement. The aggregate amount of proceeds lent to the Company under the Agreement was approximately $320 million.
Worse, the default has triggered cross-defaults on all its other repo agreements and secured loans.
Thornburg has more than $34bn in assets under management, nearly a third of which are financed through repo agreements and loans, FT Alphaville understands.
But margin calls, though the proximate cause of the defaults, are actually the face of a wider, more familiar structured finance, bank-funding, mess. Thornburg has been trying to reduce its heavy reliance on repo financing for some time. In fact, that became a key strategic imperative through 2007. The miracles by which Thornburg aimed to achieve this? CDOs and commercial paper.
A significant amount of Thornburg business in recent years, in fact, came from buying up raw MBS and then feeding them into CDOs. The companies 2007 AGM presentation states:
We purchase high-quality assets to grow our balance sheet. In 2006, we increased our purchases of loans by purchasing $6.1 billion of bulk loans and securitizing them in-house, helping us maintain our earnings in 2006.
In fact, by the end of December 2007, 64 per cent of Thornburg’s balance sheet was permanently financed through CDOs, compared with just 37 per cent in June. The latest CDO issue was on Monday, when the company managed to pass off $922m hybrid CDO of ARM loans.
The money raised went straight into reducing repo agreements and loans.
With demand for MBS CDOs virtually non existent, it’s a miracle that Thornburg managed to close as many as it did. Clearly not enough, however, because the lender also faced a second funding crunch.
Thornburg also aimed to reduce its repo dependence through commercial paper financing. The lender created a special purpose subsidy - Thornburg Mortgage Depositor, L.L.C - specifically to raise up to $10bn through revolving CP issuance. Since CP markets froze, however, Mortgage Depositor has been a massive millstone around Thornburg’s neck.
Thornburg’s problems, thus, aren’t related to the assets it owns - high-grade “jumbo” ARM mortgages to wealthy clients - but more about the way it conducted its business, and as a lender, aggressively financed its operations. The company aimed to have nearly $100bn of assets by 2009, according to presentations on its website.
Aggressive growth trajectory too heavily dependent on the vagaries of modern finance. Sound familiar to anyone in the north-east?
