Carlyle unit misses some margin calls

FT ^ | 03/06/08 | Martin Arnold and Henny Sender in London

[TigerLikesRooster]

Carlyle unit misses some margin calls

By Martin Arnold and Harry Sender in London

Published: March 6 2008 13:01 | Last updated: March 6 2008 13:01

Carlyle Capital Corp became the latest casualty of the banks’ increasingly unforgiving attitude towards even the most powerful private equity funds on Thursday when the highly leveraged mortgage-backed securities fund said it had failed to meet margin calls from some of its lenders.

The fund, listed in Amsterdam by the Carlyle Group last year, has been hit by a fall in the value of its $21.7bn portfolio of AAA-rated residential mortgage-backed securities, illustrating that even the safest investments can be perilous when combined with the use of massive amounts of borrowed money. Carlyle had $28 of borrowings for every $1 of its own money.

Carlyle said it had received one notice of default in recent days after its banks made $37m of margin calls. It expected to receive at least one.

“When funds are as leveraged as the Carlyle fund was, there is no room for error,” said one former Carlyle executive.

“Carlyle has taken extraordinary measures to help CCC manage through this liquidity crisis including purchasing certain of CCC’s investment in other Carlyle sponsored funds and providing a $150m subordinated line of credit to the fund,” Carlyle said in a note to investors in the fund.

CCC said it had met margin calls from three banks that had “indicated a willingness to work with the company during these tumultuous times”.

The fund did not elaborate on how it planned to address the violation of its financing agreements. “Management is actively working with the company’s repo counterparties to develop more stable financing terms,” the release added.

The default by CCC follows the collapse of Peloton Partners, a London-based hedge fund manager, which last week said it was liquidating its flagship $2bn fund, which had invested heavily in top-rated mortgage securities.

It also mirrors the difficulties of KKR Financial Holdings, the listed affiliate of Kohlberg Kravis Roberts, which last month said it was in talks with lenders after delaying repayment of commercial paper for a second time.

CCC last year scrapped its dividend, sold $900m of assets and extended a $150m credit line from Carlyle, as it faced $482m of margin calls from lenders in the second half of last year.

Shares in the fund fell sharply after the announcement, dropping 58.3 per cent to $5, well below its $19 issue price in its initial public offering on July 4. Its equity was worth $255.4m at the close of trading, well below its net asset value. On Thursday, it said seven of its 13 banks had submitted $37m of margin calls to CCC on Wednesday.

[olrtex]

It does seem hard to see how the lenders could make margin calls and sell collateral fast enough to protect themselves if the debt-to-equity ratio is 28:1. If some financial whiz kids are reading these comments, maybe they can enlighten us (or just agree with you that the loans are “stupid”).

[Travis McGee]

"That's right, you'll be in charge until we return from our vacation in Panama. Tell the man from the SEC to wait for us."

[Travis McGee]

When this is all untangled, a lot of the “shareholders” will turn out to be widows and orphans. Count on it.