[More on the Carlyle Group]
The collapse of the subprime- mortgage market has engulfed Carlyle Group, the world's second- biggest leveraged-buyout firm by assets.
Trading in Carlyle Capital Corp., the firm's mortgage-bond fund, was suspended in Amsterdam today after creditors forced the sale of some holdings. The fund expects to receive further margin calls, which could deplete its capital. The pool may now be liquidated and the stock rendered worthless, Bear Stearns Cos. analyst Keith Baird said in a note to clients today.
"This marks a further savage step in the ongoing credit implosion of recent months," Baird wrote.
The fund's suspension is a rare set-back for Carlyle founder David Rubenstein as he tries to expand beyond the private-equity investments his Washington-based firm pioneered, and follow rivals Blackstone Group LP and Kohlberg Kravis Roberts & Co. in tapping public market for capital. Carlyle itself had been considering going public before the credit- market gyrations and resulting slump in buyout activity cooled discussions.
"This is an unfortunate outcome for any asset manager," said Jonny Maxwell, who leads a unit at Europe's biggest insurer, Munich-based Allianz SE, that invests in private-equity funds. "It's not as if they stand alone. They were caught in a tragic market."
Carlyle Capital was suspended in the Netherlands today at the request of securities regulator AFM after falling 58 percent yesterday to $5. Trading was halted pending a statement from Carlyle, AFM spokesman Paul van Dijk said. Carlyle sold the shares for $19 in July's initial public offering.
Missed Calls
Carlyle Capital said yesterday it had failed to meet margin calls, prompting creditors to seek immediate repayment. Carlyle increased its mortgage holdings last year, selling $300 million of shares in Carlyle Capital. The fund used leverage to buy about $22 billion of AAA rated mortgage debt issued by Fannie Mae and Freddie Mac, notes that Carlyle says have the "implicit guarantee" of the U.S. government.
The fund, run by John Stomber, originally delayed and then cut the size of the initial public offering by about 25 percent as the subprime contagion began. It then added the money raised in the IPO to a private $590 million pool opened in 2006. For every dollar of equity in the fund, the pool borrowed $32.
The fund said today the additional margin calls and increased collateral requirements "could quickly deplete its liquidity and impair its capital," as they would be "well in excess" of the margin calls received two days ago.
Emma Thorpe, a spokeswoman for Carlyle in London, wouldn't comment beyond the fund's statement. Carlyle Group has extended a $150 million credit line to Carlyle Capital since August. It hasn't said how much of that line remains.
Fund Fate
The fund's fate may depend on "the attitude of the Carlyle Group as to the extent of its further support, if indeed there is any," analyst Baird wrote.
Carlyle Capital is "considering all options," the fund said its statement.
The effect of the U.S. subprime-mortgage market collapse has spilled over into top-rated agency debt, knocking down the value of the residential mortgage-backed securities. The Guernsey, U.K.-based fund said the agency mortgages it holds have the "implied guarantee" of the U.S. government.
The agency mortgage-bond market has about $4.5 trillion of securities, according to estimates from UniCredit SpA. The spread between 30-year agency mortgage bonds and 10-year U.S. Treasuries widened to more than 200 basis points this week, the highest since 1986, according to data compiled by Bloomberg.
Carlyle's counterparties are Wall Street firms, which use repurchase agreements to lend money and require securities be put up as collateral. As the perceived credit worthiness of asset-backed bonds declined, the amount of money that can be borrowed using them as collateral fell.
"Banks are hoarding cash, they're having difficulty funding themselves," said Willem Sels, a credit strategist at Dresdner Kleinwort in London. "Our concern is that market moves in price lead to mark-to-market losses, which lead to margin calls and forced selling, and then more losses in a vicious circle."
KKR Financial Holdings LLC, KKR's debt-investment affiliate, said yesterday it's in "good shape" and can weather the credit-market slump.
"We are not cavalier, we clearly admit the environment has deteriorated," KKR Financial Chief Executive Officer Saturnino Fanlo said on a conference call with investors. "KFN is in good shape for tumultuous markets."
source: 7mar2008
LONDON — Lenders to Carlyle Capital Corp. Ltd. have begun to liquidate securities held in its $21.7 billion portfolio and the fund said Friday it was considering "all available options."
The margin calls against Carlyle portend an ominous development one day after the fund was served with default notices, convulsing already skittish markets.
Shares in the fund, a listed mortgage-bond fund managed by private equity firm the Carlyle Group, were suspended Friday. The stock closed down Thursday almost 60 percent at $5.00 on Euronext Amsterdam.
Carlyle Capital said it received additional margin calls and default notices Thursday from banks that help finance its portfolio of residential mortgage-backed securities. It said it may not be able to meet the increased requirements.
The fund said it was unable to meet margin calls from four banks Thursday, raising fears that its entire portfolio could be unwound. Securities have dropped sharply in recent weeks as banks pull back on their lending, forcing investment vehicles and funds like Carlyle to dump assets.
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. Treasurys 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 have become increasingly vulnerable because their cash cushions are tiny compared with actual assets.
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 (84.86 million euros) 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.
Within weeks of the listing, it was forced to hit up the Carlyle Group for $200 million in emergency funding and it sold a $900 million loan portfolio at a loss to 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.
source: 7mar2008
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