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Thornburg Postpones Dividend

The REIT is the latest casualty of the credit meltdown, as it is beset by margin calls.

Updated from 3:33 p.m. EDT

Thornburg Mortgage


has postponed its dividend and cut its book value due to the "unprecedented" credit crunch affecting the mortgage industry.

The Santa Fe, N.M. mortgage real estate investment trust said Tuesday afternoon that it has rescheduled its quarterly dividend payment of 68 cents a share to Sept. 17. The dividend was originally to be paid on Wednesday. Thornburg also lowered its book value per share to $14.28 from $19.38 as of June 30.

The action was taken in response to "significant disruptions in the mortgage market which resulted in the sudden and unprecedented decline in the market prices of its AAA-rated mortgage securities that began on Aug. 9, 2007 and subsequent increase in margin calls related to its repurchase agreement financings on those securities," Thornburg said in a statement.

By postponing its dividend, the company "will receive its scheduled monthly mortgage payments for August and will have had more opportunity to manage through this difficult environment," it said.

"The majority of that book value decline has occurred over the past week, and is not a reflection of a change in the credit quality of our mortgage assets," said President and COO Larry Goldstone, in the statement. "As such, and barring substantial additional decline in the market value of mortgage-backed securities, we will continue to originate and invest in high-quality mortgage assets once we get through this environment. While this market event represents a disappointing setback for us and our shareholders, we will rebuild when the environment stabilizes."

The news comes after shares of the company had already been in a tumultuous 47% decline on Tuesday. The stock sank to $7.61 before trading was halted just before the market closed. The stock rose 99 cents to $8.60 in recent after-hours trading.

During the afternoon, Thornburg said that it won't accept new rate lock requests for four days. The news, which comes from a memo Thornburg sent mortgage brokers, sharpened an already steep downturn in Thornburg stock. Earlier Tuesday, five brokerage firms downgraded the stock, saying the company may be forced to sell assets to meet margin calls. One analyst wrote in a note that news of a halt in rate locks "could be the beginning of large liquidity issues for the company."

The memo was published in mortgage lender



online newsletter,

The IMB Report

. Thornburg's memo blamed "the present unprecedented and irrational sentiment in the secondary mortgage market, which has generated conditions of illiquidity throughout the industry."

Thornburg and other mortgage companies have been hit hard by the collapse of demand for mortgage-backed securities. The companies raise money by selling mortgage-backed bonds in the market, but investors have fled those markets following a sharp rise in defaults and delinquencies in recent loans to subprime homebuyers.

The credit crunch was among the factors that drove

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, among others, out of business this summer. Other stocks getting hit by the crunch include the nation's largest mortgage lender,




Earlier Tuesday, Credit Suisse, Friedman Billings Ramsey, Piper Jaffray, Jefferies & Co. and RBC Capital Markets all downgraded the stock to sell-equivalent ratings. The downgrades come just days after S&P Ratings cut its long-term credit rating on Thornburg, citing tough conditions in the debt markets.

Also Tuesday, Moody's Investors Service downgraded Thornburg Mortgage's senior debt from Ba3 to B2 and its preferred stock from B2 to Caa1.

"These rating actions reflect further deterioration in Thornburg's liquidity position due to significant funding and valuation volatility in the single-family mortgage market, even for the prime quality assets in which Thornburg Mortgage invests," says Brian Harris, a Moody's analyst, in a release.

The equity analysts also cut their earnings estimates and 12-month price targets on Thornburg.

Thornburg funds its loans through a combination of short-term borrowings, long-term secured borrowings and other capital, analysts say.

As a result of the deteriorating credit markets, lenders to companies like Thornburg are looking for their money back.

"Margin calls on repo borrowers as a result of credit spread widening and increased risk premiums have the potential to force Thornburg to sell asset at fire sale prices, leading to earnings and book value erosion," writes Jason Arnold, an analyst at Royal Bank of Canada's RBC Capital Markets, who covers Thornburg and cut his rating on the stock. "We think investors should wait on the sidelines until market volatility subsides, and clarity emerges into the impact of margin calls."

Richard Shane, an analyst at Jefferies, expected the company to suspend its dividend altogether.

"At a basic level,

Thornburg's model depends upon four elements: readily available short-term borrowings, low funding costs, equity issuance at a premium to book and stellar credit. While credit remains stable, the other three elements of the model have been shattered over the past five days," Shane wrote in a note.

"Despite solid collateral performance, the widening of spreads in all non-agency mortgage securities (including AAA-rated securities) combined with high degrees of leverage ... is presumably leading to massive asset writedowns," he adds. "We believe that margin calls exacerbated by decreased available leverage is forcing asset sales. In addition, with

Thornburg's stock trading at a substantial discount to book value, we believe the company has no opportunity to raise permanent capital to stem the tide."