NEW YORK, Mar. 19, 2008 (Thomson Financial delivered by Newstex) -- Shares of Thornburg Mortgage (NYSE:TMA) tanked Thursday after the Santa Fe, N.M., home loan provider outlined the terms of a one-year reverse repurchase override agreement that will be extremely dilutive to common shareholders.

The company also disclosed it needs to raise a minimum of $948 million in new capital in the next seven business days in order to secure the deal.

Thornburg, which also said it's currently facing margin calls of roughly $530 million, suspended its common stock dividend for the near term.

The shares dropped almost 27% to $2.18 in recent trades, bouncing slightly after scraping a low of $2. The stock is now down about 76% since the start of the year. Volume of 19.7 million was nearing the issue's 30-day average of 20.4 million less than an hour into the session.

The reverse repurchase agreement covers five counterparty lenders that have agreed to a contractual reduction of the margin requirements to financing the company's mortgage securities. They have also agreed to suspend their right to invoke further margin calls.

The five counterparties - Bear Stearns (NYSE:BSC) Investment, Citigroup (NYSE:C) Global markets, Credit Suisse Securities, Credit Suisse International, Greenwich Capital Markets, Royal Bank of Scotland and UBS (NYSE:UBS) Securities - are providing about $5.8 billion in reverse repurchase financing.

The deal requires that Thornburg create and maintain a $350 million liquidity fund.

The company intends to raise the required immediate new capital through the sale of $1 billion in convertible senor notes due in 2015. The notes will have an interest rate of 12% and an initial conversion rate of 75 cents a share.

Thornburg said it would use the proceeds to pay its unmet margin calls on reverse repurchase agreements. Without this agreement, Thornburg would be required to pay an additional $90 million in margin calls. It would also have to meet any additional margin calls that arose from any continued decline in mortgage securities prices since March 5.

As part of the agreement, Thornburg will issue warrants to the counterpaties to buy 47 million shares of its common stock, which represents about 27% of its outstanding shares. The warrants have an exercise price of 1 cent per share and are exercisable for five years.

The company also said the counterparties will be able to terminate the deal if the company doesn't meet the requirement to pay all of the principal as well as interest payments of at least 20% related to the collateral securing the reverse repurchase, securities lending and auction swap agreements.

Thornburg also said it must further reduce its current reverse repurchase agreement borrowings outstanding with two counterparties by an additional combined $1.2 billion. It plans to make these reductions either through asset sales or transfers of collateral specified in the agreement. Once these reductions are completed, the deal will cover a total of $7.9 billion outstanding principal amount of mortgage securities.

Ryan Vlastelica
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