Capital Markets

Odd Coupling: Thornburg, Lehman Raise Capital

Both are hit, to varying degrees by the subprime crunch. Thornburg hopes to stave off bankruptcy, while Lehman merely aims to increase financial fl...
Stephen TaubApril 1, 2008

Thornburg Mortgage Inc. and Lehman Brothers Holdings Inc. — two major outfits hit in sharply varying degrees by the subprime crisis and overall credit crunch — have successfully raised money from investors, strengthening their capital bases.

Thornburg said it raised $1.35 billion from the sale of senior subordinated secured notes, warrants to purchase common stock and a participation in certain mortgage-related assets.

Thornburg, the jumbo mortgage provider that is desperately trying to stave off bankruptcy, received $1.15 billion of the proceeds from the private placement offering. The remaining $200 million is being held in escrow and will be delivered to the company once it successfully completes a tender offer for its preferred stock. The proceeds of its offering will be used to satisfy the outstanding margin calls owed to the reverse repurchase agreement counterparties.

The company’s senior subordinated secured notes, which are scheduled to mature on March 31, 2015, have an eye-popping interest rate of 18 percent. It will be adjusted to 12 percent upon shareholder approval of an increase in the number of shares the company may issue to four billion shares and the successful completion of a tender offer for the preferred stock.

Meanwhile, Lehman said it priced a $4 billion offering of four million shares of 7.25 percent convertible preferred stock. Each share of the preferred stock will be convertible at any time, at the option of the holder, into 20.0509 shares of Lehman common stock, which represents an initial conversion price of approximately $49.87 per common share.

Lehman said it conducted the offering after receiving substantial interest from several key long-term clients and institutional investors. The investment bank said it will use the proceeds to bolster its capital and increase financial flexibility.

“The significant oversubscription for this deal demonstrates the confidence that investors have in Lehman Brothers,” said Erin Callan, managing director and chief financial officer of Lehman Brothers and a member of the Firm’s executive committee. “The success of the transaction is also reflective of the strength of the business model, the capital base and liquidity profile of the Firm as we continue to successfully weather challenging environments.”

Common stock investors seemed to take comfort in Lehman’s announcement even though their stakes will be potentially diluted. However, the credit rating companies did not exactly give it a full vote of confidence. Fitch Ratings Tuesday revised Lehman’s rating outlook to negative from stable. It noted the firm has about $146.8 billion of long-term debt, including current year maturities of $18.5 billion with $7.8 billion of commercial paper.

“The outlook revision to negative from stable results from increased earnings pressure and leverage as inventory expanded in residential and commercial real estate related securities and loans and corporate loans and commitments,” Fitch said in its announcement. It also expressed concerned about the lack of an active securitization market, which it asserts will negatively impact earnings either from future valuation changes or realized losses as Lehman reduces its exposures throughout 2008.

However, Fitch did say that the $1.5 billion in preferred stock that Lehman issued in January 2007 and the latest offering combine to reduce leverage, positively impacting Fitch’s credit view.

“Liquidity remains strong with Lehman’s lower reliance on short-term funding relative to its peers providing support for Fitch’s short-term ratings,” Fitch added. “Lehman continues to report strong cash and unencumbered securities at its parent, good net cash capital levels, and no reliance on free credit balances within its smaller prime brokerage operations. Fitch believes Lehman has managed its liquidity particularly well in the last eight months.”