Thornburg Mortgage Announces One-Year Reverse Repurchase Override Agreement and Proposed $1 Billion Public Offering of Convertible Notes

Thornburg Mortgage, Inc. (NYSE:TMA) today announced that the company has entered into a 364-day agreement with five of its remaining reverse repurchase agreement counterparties and their affiliates who are providing approximately $5.8 billion of reverse repurchase agreement financing whereby these counterparties have agreed to both a contractual reduction of margin requirements for financing the company’s mortgage securities and a suspension of their rights to invoke further margin calls and related rights under their reverse repurchase agreements, global master securities lending agreements and auction swap agreements with the company subject to certain covenants and conditions discussed below. The reverse repurchase agreement counterparties and their affiliates who entered the override agreement with Thornburg Mortgage include Bear Stearns Investment Products Inc., Citigroup Global Markets Limited, Credit Suisse Securities (USA) LLC, Credit Suisse International, Greenwich Capital Markets Inc., Greenwich Capital Derivatives, Royal Bank of Scotland PLC, and UBS Securities LLC. Commenting on the significance of this landmark agreement, Larry Goldstone, president and chief executive officer of Thornburg Mortgage, Inc. said, "This is an unprecedented collaboration on the part of the company and its reverse repurchase agreement counterparties. This agreement illustrates the high degree of confidence our reverse repurchase agreement counterparties have in the superiority of our origination franchise, the quality of our assets and the strength of our management team.” The company must further reduce its current reverse repurchase agreement borrowings outstanding with two reverse repurchase agreement counterparties by an additional combined $1.2 billion. It has already reduced one counterparty’s balance by at least the required minimum of $500 million, leaving that counterparty with a remaining balance of approximately $1.467 billion, and has 60 days to reduce another $680 million of borrowings with a second counterparty. The company plans to achieve these reductions either through asset sales or transfers of collateral specified in the agreement. Once these reductions are completed, the company estimates that this agreement will affect approximately $7.9 billion of outstanding principal amount of mortgage securities with an estimated dealer market value of $6.4 billion as of March 5, 2008 that are held in the company’s portfolio and are collateralizing reverse repurchase agreement obligations approximating $5.8 billion. The continued effectiveness of this agreement is contingent upon a variety of factors that are specified in the agreement, the most urgent of which requires that within seven business days Thornburg Mortgage raise a minimum of net proceeds of $948 million in new capital. The company intends to use a portion of those proceeds to pay reduced but currently unmet margin calls on reverse repurchase agreements and to auction swap providers of $530 million plus deficiency claims of $28.7 million and additional claims estimated to be $30 million. Absent this agreement, the company would be obligated to pay an additional $90 million in margin calls and would also be responsible for meeting any additional margin calls that might have occurred as a result of the continued decline in mortgage securities prices that have occurred since March 5, 2008. The agreement also requires the company to establish and maintain a liquidity fund in the amount of $350 million, and to maintain an amount in that fund equal to 5% of the monthly outstanding borrowings of its reverse repurchase agreement counterparties in investments that are either Treasury securities, agency mortgage-backed securities or retained classes of mortgage securities that arise from the company’s loan origination business. In order to continue to pay down its existing reverse repurchase agreement borrowings, the company has agreed to allow the reverse repurchase agreement counterparties who are party to this agreement to capture 100% of the monthly principal payments that they receive on the collateral they are holding plus 20% of the monthly interest. These funds will be applied to reduce the outstanding balance on these borrowings monthly. Further, the company has agreed that it will not borrow any additional funds in the reverse repurchase agreement market during the term of this agreement. In order to preserve cash, the company has also agreed to suspend its common stock dividend during the term of the agreement, although it will be permitted to declare a dividend in December 2008, payable in January 2009, of up to 87% of its taxable income for 2008. In addition, the company will suspend its preferred dividend if the amount in the liquidity reserve falls below 5% of the outstanding balance of the reverse repurchase agreement borrowings for three consecutive months. In connection with the agreement, the company will also issue to the parties of this agreement warrants to purchase approximately 47 million shares of the company’s common stock at an exercise price of $0.01 per share, exercisable for a period of five years. The common stock issuable upon exercise of these warrants would be equal to approximately 27% of the company’s outstanding common stock. The counterparties may terminate the override agreement if the company does not pay to the counterparties all of the principal and 20% (or 30% in certain circumstances) of the interest payments received with respect to the collateral securing the reverse repurchase, securities lending and auction swap agreements, if the company fails to comply with certain obligations under the override agreement or if the company voluntarily or involuntarily becomes a debtor in a bankruptcy proceeding. The override agreement will terminate 364 days after the date of its execution. If after that time the company does not fully comply with the provisions of the reverse repurchase, securities lending and auction swap agreements the counterparties will again have the right to invoke margin calls and exercise all of their other rights under the reverse repurchase, securities lending and auction swap agreements. Additionally, the company has agreed to not pay any incentive management fees to its manager, Thornburg Mortgage Advisory Corporation, so long as this agreement is in effect. Instead, the company will accrue such payments and remit the cash to its reverse repurchase agreement counterparties as a way to further reduce outstanding borrowing amounts. Goldstone continued, "After careful consideration of our available options given the continued challenges in the mortgage securities markets, the company’s board of directors determined that the override agreement and this proposed capital raise and warrants offerings, though highly dilutive for existing shareholders, are in the best long-term interest of the company. By placing a one-year moratorium on margin calls and raising the required amount of capital specified in this agreement, we believe we will have the necessary liquidity and staying power to manage through this highly volatile and uncertain mortgage market environment.” As mentioned above, under the conditions of the agreement, Thornburg Mortgage intends to raise approximately $948 million net proceeds in new capital through the issuance of at least $1 billion aggregate principal amount of contingently convertible senior subordinated notes due in 2015, with an interest rate of 12% and an initial conversion rate of 1,333.3333 shares per $1,000 of principal amount of the notes (which represents an initial conversion price of $0.75 per share). The company will also grant the underwriters an option to purchase an additional $150 million aggregate principal amount of the notes. The proposed 12% senior subordinated notes will mature on April 1, 2015, unless earlier redeemed, repurchased or converted. The underwriters for the offering include Friedman Billings Ramsey, UBS Investment Bank, Jefferies & Company, JMP Securities and Keefe, Bruyette & Woods. In addition to the convertible notes, the company will issue warrants to the note holders. Each purchaser of the notes will receive detachable warrants to purchase shares of common stock, which are exercisable at an exercise price of $0.01 per share, which warrants in the aggregate will be equal to approximately 5% of the then outstanding fully diluted equity. The convertibility of the notes into common stock will be contingent upon shareholder approval of an increase in the authorized capital stock of the company. Shareholders will vote on this authorization at the company’s annual meeting, which is intended to take place on or before May 22, 2008. If shareholder approval is obtained, the notes will be convertible, at the option of the holder, at an initial conversion rate of 1,333.3333 shares per $1,000 of principal amount of the notes, which represents a conversion price of $0.75 per share. Issuance of the common stock upon conversion of the notes could result in the issuance of more than 500% of our currently outstanding common stock. If shareholder approval is not obtained, the interest rate payable on the notes will increase to 25% and the company will be obligated to issue additional warrants to note holders as described below. If shareholder approval of the increase in authorized shares is not obtained, each purchaser would also then receive additional warrants to purchase additional shares of common stock equal to the then remaining available authorized but unissued shares of common stock, exercisable from May 22, 2008 to April 1, 2015, at an exercise price of $0.01 per share. The issuance of the securities pursuant to the override agreement and the note offering described above would normally require approval of the company’s shareholders in accordance with the shareholder approval policy of the New York Stock Exchange. However, after a careful review of the facts, the members of the Audit Committee of Thornburg Mortgage’s Board of Directors determined that any delay caused by securing shareholder approval prior to the issuance of these securities would seriously jeopardize the financial viability of the company. Pursuant to an exception in the New York Stock Exchange’s shareholder approval policy, the company’s audit committee members approved the company’s omission to seek the shareholder approval that would otherwise have been required under that policy. The New York Stock Exchange has accepted the company’s application of the exception. In reliance upon this exception, the company is mailing a letter to all shareholders notifying them of its intention to issue the securities without prior shareholder approval. Looking ahead, Goldstone concluded, "With a reprieve from margin calls and a stabilized financing platform, the override agreement and the completion of our proposed offering should allow us to return our focus to our core business operations -- the origination and securitization of adjustable-rate mortgage loans with superior credit performance. We intend to build on our leadership position in the prime jumbo and super jumbo sector of the mortgage industry.” The convertible notes and warrants will be offered and sold pursuant to a shelf registration statement previously filed with the Securities and Exchange Commission. Prospectus supplements relating to any public offering of securities will be filed with the Securities and Exchange Commission. The statements in this press release that are not historical facts are forward-looking statements within the meaning of the federal securities laws. These forward-looking statements are based on management’s current expectations and are subject to uncertainty and changes in circumstance due to a number of factors, including but not limited to: general economic conditions; ongoing volatility in the mortgage and mortgage-backed securities industry; the Company’s ability to complete the capital raise required for the effectiveness of the override agreement; the Company’s ability to meet the ongoing conditions of the override agreement; the Company’s ability to obtain shareholder approval of an increase in authorized shares; market prices for mortgage securities, interest rates, the availability of ARM securities and loans for acquisition and other risk factors discussed in the company's SEC reports, including its most recent annual report on Form 10-K/A, its Registration Statement on Form S-3 and the prospectuses for these offerings. These forward-looking statements speak only as of the date on which they are made and except as required by law, the company does not intend to update such statements to reflect events or circumstances arising after such date.