Thornburg looks to sell up to $1.35 bln of bonds

New houses are being constructed in Carlsbad, California January 18, 2008.

NEW YORK (Reuters) - Thornburg Mortgage Inc TMA.N said on Tuesday that it was looking to sell up to $1.35 billion of bonds as the "jumbo" mortgage lender tries to raise the funds necessary to keep lenders at bay and avert bankruptcy.

The company's shares were up 32 percent to $1.68 amid investor hopes that Thornburg had staved off filing for bankruptcy protection. The shares have fallen more than 80 percent since the end of December.

The mortgage lender is struggling to avoid becoming the latest casualty of the widening housing crisis, which has made it hard for even lenders with relatively high-quality assets to fund themselves.

The company had originally planned to sell convertible debt, but is now instead selling senior subordinated secured notes with embedded warrants.

Thornburg already has at least one buyer for a block of the securities -- private equity fund MatlinPatterson, which according to a filing is willing to buy $450 million of notes if Thornburg can find buyers for at least an additional $700 million of debt.

Thornburg said late on Monday that it had changed its bylaws to allow a single investor to buy up to $300 million of stock.

The mortgage lender is paying an annual interest rate of 18 percent on the notes. That rate can be adjusted down to 12 percent if Thornburg shareholders vote by June 15 to increase the number of authorized shares, and the company offers to buy back most of its preferred shares.

The embedded warrants offer the noteholder the option to buy Thornburg shares at a penny apiece. The investor can in turn sell that warrant to other parties.

The Santa Fe, New Mexico, company has had difficulty financing itself amid the widening U.S. housing crisis. Its lenders have demanded it put up more than $600 million of collateral or cash in recent weeks. The company is now raising capital as a condition of some of its banks reducing margin calls and loosening other obligations.

Thornburg focuses on adjustable-rate mortgages of more than $417,000, which until recently were too big for Fannie Mae and Freddie Mac to buy.

(Reporting by Dan Wilchins; Editing by John Wallace and Lisa Von Ahn)