July 22 (Bloomberg) -- Thornburg Mortgage Inc., the ``jumbo'' home lender that averted bankruptcy in March, may offer investors a chance to earn a 37 percent profit under terms of its rescue package.

Preferred shareholders will receive $5 in cash and 3.5 common shares if two-thirds of holders tender their stakes by Sept. 30. Were the deal to close today, holders would receive cash and stock totaling $6.09 for each preferred share, which closed yesterday between $4.46 and $4.62.

The bailout, financed by MatlinPatterson Global Advisers LLC, is little consolation for longer-term shareholders who have lost as much as 99 percent of their investment in the past year amid the worst housing crisis since the Great Depression. Arbitragers who buy the preferred shares now are betting that at least 67 percent of stakeholders tender their shares to execute the deal and keep Santa Fe, New Mexico-based Thornburg out of bankruptcy.

``Investing at any level of this thing other than being a subscriber of the MatlinPatterson financing means that you adopt the risk that the tender does not go through,'' said Kevin Starke, an analyst at Stamford, Connecticut-based CRT Capital Group LLC. ``The fact that the arb spread on these remains wide tells you there's still considerable concern.''

After tumbling below 20 cents earlier this month, Thornburg shares climbed 48 percent since July 16 to 31 cents, sweetening the deal for investors. The jump followed better-than-expected results from Wells Fargo & Co. and JPMorgan Chase & Co.

Avoided Subprime

Founded by Garrett Thornburg and Larry Goldstone in 1993, Thornburg specializes in mortgages of more than $417,000 offered to customers with stronger credit. Less than 0.7 percent of its loans were delinquent as of March 31.

While the company avoided the subprime market that pummeled Countrywide Financial Corp. and Washington Mutual Inc., it ran out of cash as lenders demanded payments to cover the declining value of its mortgage securities. Writedowns on those securities resulted in a $3.31 billion first-quarter loss.

MatlinPatterson, based in New York, and other investors provided Thornburg with $1.15 billion in return for stock, warrants and senior subordinated notes that will ultimately give the buyout firm almost complete financial control. Thornburg will get about $200 million more from an escrow account on completion of the tender offer.

`Interesting Arbitrage'

The Series E preferred shares, down 82 percent over the past year, rose 7 cents to $4.53 at 10:49 a.m. in New York trading today. Thornburg's common shares fell 1 cent to 30 cents.

``There is a pretty interesting arbitrage available,'' Goldstone said to investors on a June 12 conference call, when preferred shares were trading at about $4.30 and the common stock was at 75 cents, representing a 77 percent spread at the time. ``That's a pretty nice upside return.''

In the question-and-answer session that followed, investors expressed their dismay. Those who bought preferred shares at $25 and expected a dividend must sell for $5 in cash plus stock that today is worth $1.09.

``I don't ever think I have ever seen in my years on the Street, a $25 par being called in at $5,'' said Shelley Bergman, of New York-based Morgan Stanley, who said he owned shares for himself and clients.

Goldstone responded saying the company didn't have time to negotiate a better deal because its lenders were threatening to sell off all of the bank's assets within two weeks.

``We would have been a liquidated entity and the preferred shareholders would have gotten nothing,'' said Goldstone. ``That would have been game over.''

To contact the reporter on this story: Ari Levy in San Francisco at alevy5@bloomberg.net

Last Updated: July 22, 2008 11:04 EDT