MatlinPatterson writes off $450m investment in mortgage lender

The distressed investment specialist is surrendering all its stock in Thornburg Mortgage and has resigned its board seats. The residential mortgage lender has been given a grace period by lenders to come up with a restructuring plan.

MatlinPatterson has written off its entire investment in US home mortgage lender Thornburg Mortgage, which may have to file for bankruptcy under a heavy debt load. 

The private equity firm surrendered all its stock in the company – about 120 million shares – for no compensation, according to filing with the Securities and Exchange Commission. David Matlin and Mark Patterson, the firm’s principals,  have also resigned from Thornburg’s board. However, MatlinPatterson retains the right to participate in the company’s restructuring process.

Thornburg said this week that its lenders had agreed to extend to 31 March its grace period on its debt obligations, so that the company has more time to craft a restructuring plan.

The company’s options include a “consensual restructuring, reorganisation or recapitalisation of the company and may also include the filing of a petition for relief under Chapter 11”, it said in a filing.

Thornburg, based in Santa Fe, New Mexico, has hired law firm Kirkland & Ellis and financial advisor Houlihan Lokey Howard & Zukin to help with the restructuring process.

The company has struggled with liquidity since 2007, when the value of the mortgages in its portfolio began to plummet as US credit market dislocation began.

MatlinPatterson bought into Thornburg last March, committing to invest $450 million in the company’s senior subordinated secured notes as part of the company’s efforts to raise $1.35 billion. The firm made the investment from the $5 billion MatlinPatterson Global Opportunities Partners III, which closed in 2007.

It is not the only portfolio company MatlinPatterson has seen fall victim to the global financial crisis. Last year, ATA Airlines, a US regional airline, collapsed into bankruptcy blaming high fuel prices and the loss of a military charter flights contract. The firm bought into the airline in 2006 after helping pull it out of Chapter 11 protection with a $30 million bankruptcy financing loan that allowed the airline to operate while reorganising. MatlinPatterson also committed to provide $70 million in equity upon ATA’s emergence from bankruptcy.

MatlinPatterson is just one of numerous private equity firms that have lost their equity investments in struggling companies or to have portfolio companies undergoing a restructuring of some kind. For example, Apollo Global Management-backed Harrah’s has been restructuring its debt for several months, while Bain Capital-backed OSI Restaurant Partners, which owns the Outback Steakhouse chain, has reportedly hired AlixPartners and Miller Buckfire for a restructuring.

According to Jeff Feinberg, a managing director with restructuring firm Alvarez & Marsal’s private equity practice, “every private equity firm we have been talking to, easily 25 percent of their portfolio businesses are struggling”.

“Companies took on debt that shouldn’t have taken on debt, heavy or not heavy, with light covenants, and they were okay with minor slippages,” Feinberg said. “Now we have a deterioration unlike anything we’ve ever had before.”