Carlyle Fund Expects Assets Will Be Seized
By JULIA WERDIGIER
Published: March 13, 2008
LONDON — Shares of Carlyle Capital plunged on Thursday, losing most of their value, after the company said it expected its lenders to promptly take over all its assets after discussions with banks to refinance the fund failed.
Carlyle Capital, an Amsterdam-listed affiliate of the Carlyle Group, the private equity fund, said it “has not been able to reach a mutually beneficial agreement to stabilize its financing.” Its shares fell more than 70 percent Thursday. They have fallen more than 90 percent since the company’s problems became public last week.
“It has become apparent to the company that the basis on which lenders are willing to provide financing against the company’s collateral has changed so substantially that a successful refinancing is not possible,” Carlyle Capital said in a statement late Wednesday.
Carlyle Capital invested in triple-A rated mortgage debt issued by Fannie Mae and Freddie Mac, and like other investment vehicles it had leveraged its capital aggressively, borrowing $31 for every dollar of equity. As of February, it had $21.7 billion worth of assets in its investment portfolio. But as those investments lost value, creditors demanded that it put up more and more money in margin calls. A $150 million line of credit from its parent, the Carlyle Group, was not enough to keep it out of trouble as lenders demanded more collateral to back up their loans.
By Wednesday, it had already defaulted on about $16.6 billion of debt and some lenders started to liquidate assets. Talks to halt liquidations and revive the fund’s finances failed Wednesday night after the value of collateral declined further, prompting additional margin calls worth $97.5 million.
The announcement sent shudders through Asian and European markets as investors fear more funds, even those investing in highly-rated assets, could run into trouble. Banks are calling in loans or ask for more collateral as the value of assets backed by mortgage-securities continue to decline.
The collapse of talks between Carlyle Capital and some of its lenders, which include Bear Stearns, Bank of America, Citigroup and Merrill Lynch, shows that a plan earlier this week by the Federal Reserve to back some assets like private mortgage bonds has not stopped banks from demanding more collateral.
On Wednesday, Drake Management, based in New York, said it might shut its largest hedge fund, while investors in a fund managed by Amsterdam-based GO Capital Asset Management were prohibited from withdrawing funds.
Peloton Partners, a hedge fund based in London and run by former Goldman Sachs partners, was forced to liquidate its largest funds last month after it failed to reach an agreement with some of its lenders on the levels of collateral. Thornburg Mortgage, a big United States lender, also ran into trouble after it failed to meet some margin calls.
Hedge funds are hoping investors and lenders will stop withdrawing money or calling in loans to avoid fire sales of assets and instead wait until the markets pick up again. But many investors are looking to cut their losses and banks have internal mechanisms that activate margin calls when the value of collateral drops.
In a statement on Wednesday, the Carlyle Group made it clear that it had not purchased any of Carlyle Capital’s securities and said it was only linked to the fund by name, a $150 million credit line and the fact that about 15 percent of the fund’s securities are owned by Carlyle Group employees.
Carlyle Group, one of the largest private-equity firms, helped set up the fund in 2006 as it wanted to expand beyond its core leveraged-buyout business. The fund sold shares in an initial public offering on the Amsterdam stock exchange in July 2007 after first delaying and the reducing the size of the sale.
