Carlyle Capital Considers "All Available Options"

From the Associated Press:

Carlyle Capital Corp. Ltd., a listed mortgage-bond fund managed by private equity firm the Carlyle Group, said Friday it was considering "all available options" after lenders started liquidating securities from its $21.7 billion portfolio.

Shares in the fund, which trade on Euronext Amsterdam, were suspended Friday pending a further statement. The stock closed down Thursday nearly 60 percent at $5.00.

The fund said it received additional margin calls and default notices Thursday from banks that help finance its portfolio of residential mortgage-backed securities. It indicated it may not be able to meet the increased requirements, and that further liquidations were possible.

Carlyle Capital on Thursday said it had been unable to meet margin calls with four banks the day before, roiling financial markets and raising fears that its entire portfolio could be liquidated. Such a move would further depress prices on fixed-income securities, which have dropped sharply in recent weeks as banks pull back on their lending to funds and investment vehicles, leading to forced asset sales.

In Friday's statement, Carlyle Capital said it had received "substantial additional margin calls and additional default notices from its lenders." It also said that lenders were selling off securities held as collateral.

Carlyle Group has a $150 million credit facility with Carlyle Capital.

"But we don't expect it to have any material impact" on the parent company, said Emma Thorpe, director of European communications.

Risk premiums on residential mortgage-backed securities widened Thursday, stocks fell, and U.S. Treasuries rallied as investors sought safety.

Carlyle Capital said Friday it is in continued discussions with its lenders about its financing situation, but warned shareholders that the additional margin calls and increased collateral requirements to keep funding in place could quickly deplete its liquidity and impair its capital.

Carlyle Capital leverages its $670 million equity 32 times to finance a $21.7 billion portfolio of residential mortgage-backed securities issued by U.S. housing agencies Freddie Mac and Fannie Mae.

To do this, it enters into repurchase agreements with banks, which involve posting the mortgage securities as collateral in exchange for cash.

If the value of the security held as collateral falls, the lender will ask for more collateral -- a "margin call" -- in order to secure the loan. If the borrower does not meet the margin call by putting up more collateral, the lender may sell the security.

Highly-leveraged funds are the most vulnerable to failing to meet lender requests for more cash or collateral, since their cash cushions are relatively small to their asset base.

Sudden price moves in the underlying assets can send margins spiraling, quickly depleting a fund's cash.

Carlyle Capital said Friday that, as of last week, it believed it had sufficient liquidity. It had reassured investors on its funding situation in is annual report Thursday, saying it had $2.4 billion in unused repo lines and a $130 million liquidity cushion.

"In the past several days there has been a rapid and severe deterioration in the market for U.S. government agency AAA-rated residential mortgage-backed securities," Carlyle Capital said Friday.

The fund is managed by a unit of Washington D.C.-based Carlyle Group. It initially was launched as a private fund in 2006, then floated on Euronext Amsterdam in July, with the aim of paying a 10 percent dividend.

Within weeks of the listing, it was forced to tap Carlyle Group for $200 million in emergency funding and sold a $900 million loan portfolio at a loss to help meet margin calls. Last week, Chief Executive John Stomber said the fund "can and will do better" after the difficulties in 2007.

Net asset value per share sank 30 percent last year, to $13.11 at Dec. 31 from $18.65 shortly before the listing. The stock, which had been offered at $19, also performed poorly, losing 37 percent before Thursday's announcement.

By Dan Beyers  |  March 7, 2008; 8:02 AM ET  | Category:  Carlyle Group
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Comments

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they leveraged their equity 32 times? Gad, that's a lot of alleged money based on a very tiny amount of actual in-hand cash.

Bigger picture: At what point in all this does the Washington Post, NYTimes and others, run the big headline saying that we're all in deep kimshee?

Posted by: ogden utah | March 7, 2008 12:49 PM

A firm that had ex-President George Bush and ex-Prime Minister John Major as directors might have dealt with its affairs more prudently - what were these 'great' men for, other than to be prudent, or am I being naive?

Posted by: Geoffrey Woollard | March 9, 2008 2:43 PM

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