Tuesday, March 17, 2009

Matlin Patterson On Verge Of Large Rout

Even distressed investing legends make horrible decisions. The latest example is Thornburg Mortgage, a single-family residential mortgage lender focusing on "prime and superprime" borrowers, which was saved from bankruptcy last March by a Matlin Patterson-led consortium which executed a global refinancing that saw $1.4 billion of new sub secured notes come in to provide critical operational funding to satisfy margin calls, auction swaps and various other cash needs. Matlin Patterson was a lead investor in the notes with $450 million of capital (out of its MP Global Opportunities Partners III LP fund), and additionally the company holds 120 million shares of Thornburg stock (which was last trading at $0.04).

At the time of the original investment, on March 19, 2008 Thornburg executed a 364-day override agreement with providers of its reverse repurchase agreements (Bear Stearns, Citi, CS, RBS Greenwich and UBS). This agreement expired yesterday but instead of being forced to seek chapter 11 protection, the company announced it had entered into a short-term forbearance with Override counterparties which expires on March 31. However, the writing on the wall is clear: the company announced it had hired bankruptcy lawyers Kirkland and Ellis and restructuring advisor Houlihan Lokey to help in "discussions with its key constituents, including creditors, current shareholders and prospective new investors, and to help evaluate and implement a recapitalization solution that addresses the issues currently facing the Company."

Additionally, bondholders of the 12%/18% notes apparently agreed to be effectively crammed down proactively in the hopes that new capital will come in: per the press release bondholders have agreed to release liens, as "the Company requested the lien release to facilitate its ability to arrange additional financing in the future."

While Matlin Patterson can likely afford this hiccup on its road to distressed domination, more so than anything, the TMA fiasco is just another example of how easy it is to call a false market bottom and how capital can disappear promptly as a result.


Update: Matlin Patterson just filed this 13D in which they disclose that bankruptcy of TMA is just a formality at this point:
The Reporting Persons are discussing with the Issuer and certain other constituencies of the Issuer possible restructuring, recapitalization or reorganization transactions (under Chapter 11 of the U.S. Bankruptcy Code or otherwise). There can be no assurance as to whether or when any of the foregoing, or other, transactions will occur.
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