Carlyle Capital defaults on debt
Carlyle Capital Corp., a highly leveraged affiliate of buyout giant Carlyle Group, defaulted on $16.6 billion of debt and expects lenders to seize its portfolio of mortgage-backed bonds, Carlyle Group said Thursday.
Formed last summer as the credit crunch was taking hold, Carlyle Capital invested in highly rated securities issued by Fannie Mae and Freddie Mac. As the credit crisis intensified in recent weeks, even those relatively safe holdings lost market value, prompting the fund’s Wall Street lenders to demand more collateral.
When the fund, based in Guernsey, a British offshore dependency, failed to meet those “margin calls,” lenders began to sell the firm’s mortgage-backed bonds they held as collateral.
“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 late Wednesday, after trying for the last week to work out a deal with lenders.
Carlyle Capital’s shares, which are traded in Amsterdam, plunged 87% on Thursday to about 35 cents. The fund went public in July at $19 a share.
Although managers at Washington-based Carlyle Group own about 15% of Carlyle Capital, Carlyle Group said the fund was a separate entity whose troubles wouldn’t have a measurable effect on the private equity firm’s other funds and investments.
The buyout giant said it had worked exhaustively to assist Carlyle Capital and had taken “extraordinary measures” to help it through its liquidity crisis.
The fund raised $670 million by selling shares last year and then, hoping to boost returns, borrowed 32 times that amount.
“It was a poorly conceived fund launched at the worst time,” said Toby Nangle, a member of the strategic policy group at Baring Asset Management in London.
Analysts said other leveraged funds could face the same fate as Carlyle Capital.
“We are in a vicious spiral of unwinding years of increasing leverage in the space of a few weeks,” said Andrea Cicione, a credit strategist at BNP Paribas, one of Carlyle Capital’s lenders, “and no one can say how much leverage must be wrung out before the unwinding comes to an end.”
“This is not only a problem for Carlyle,” Jochen Felsenheimer, the head of credit strategy in Munich for UniCredit, wrote in a note to clients Thursday. “We expect a further flood of downgrades especially of higher-rated securities, putting enormous pressure on the system.”
