Clock's Ticking, Thornburg

Call it what you wish. Mark-to-market, mark-to-mayhem, mark-to-melancholy, whatever. By any measure, once-thriving mortgage house Thornburg Mortgage (NYSE: TMA  ) is in a heap of trouble now.

Dilutive delusions
With shares down more than 90% year to date, investors have entered the all-too-embarrassing land of penny stocks. Management threw up the mother of all Hail Marys in late March, issuing $1.35 billion in debt paying an initial 18% yield, with warrants to purchase common stock for $0.01 per share. That last-ditch effort saved Thornburg from a looming trip to the graveyard, but now existing shareholders have to ask a serious question: What's left for me?

To put it mildly: condolences, old share certificates, and a few scraps of whatever's left. The capital-raising campaign diluted existing shareholders on a monumental scale, leaving them with just 5.5% of common stock once all is said and done, according to Thornburg.

Cry me a river
Shareholders have grumbled all along that the losses are merely a product of the market's skittish mood, not actual defaults on its mortgage products. Falling victim to a debt market frozen in place, Thornburg was saddled with margin calls earlier this year that brought it to its knees, perhaps independent of the actual credit quality of its assets.

That very well may be true. But as others who ventured into the magical world of leverage have discovered, once you pile on debt like there's no tomorrow, you're held hostage by time and temper -- both of which lie completely out of your control. Thornburg's balance sheet at the end of 2006 -- when real estate was alive and kicking and products were "properly" valued -- shows a debt-to-equity ratio of more than 20 to 1. That left very little wiggle room once the market took a breather, which it inevitably would. And did.

What now?
Now Thornburg's delaying its quarterly report with the SEC, further fueling the fears that have already caused it such a headache. What's next for shareholders? If you're searching for a solid, dependable growth company, look elsewhere. At best, Thornburg shareholders will stave off more bad news and ride the typical volatility attached to penny stocks.

Whether Thornburg will be able to keep its doors open is another story. However, the massive share dilution and delayed filings leave few reasons to argue in favor of owning the company's shares. Thornburg, along with fellow leveraged share-diluters E*Trade (Nasdaq: ETFC  ) , Ambac (NYSE: ABK  ) , and (on a much smaller scale) Citigroup (NYSE: C  ) , have dug their own graves.

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Fool contributor Morgan Housel doesn't own shares of any of the companies mentioned in this article. The Fool has a disclosure policy.


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  • Report this Comment On May 27, 2008, at 6:16 PM, slipjack wrote:

    Potential dilution, re: ETFC. Not dilutive action yet. Keep your facts straight.

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