March 13, 2008
from
NewsMax Website
NEW YORK
- The likely liquidation of Carlyle Capital
Corp.'s remaining assets sent the fund's shares plummeting more than 90
percent Thursday and rattled stock markets around the globe. It was also a
high-profile setback for private equity fund Carlyle Group.
Carlyle Capital said late Wednesday that it expected creditors to seize all
of the fund's remaining assets _ investment-grade mortgage-backed securities
_ after unsuccessful negotiations to prevent its liquidation.
Its shares, which went public at $19 a share in July and traded at $12 just
last week, tumbled 93.6 percent to 18 cents on the Euronext exchange.
The Amsterdam-listed fund shook financial markets last week after missing
margin calls from banks on its $21.7 billion portfolio of
residential-mortgage-backed bonds.
Carlyle's troubles have amplified fears that
billions of dollars of depressed mortgage-backed securities will flood the
market, reducing their value even further.
"Although it has been working diligently
with its lenders, the company has not been able to reach a mutually
beneficial agreement to stabilize its financing," Carlyle Capital said
in a statement.
Carlyle's troubles heightened worries about the
billions of dollars in depressed mortgage-backed securities, one factor that
sent stock markets down. The Dow Jones industrial sank more than 200 points,
following indexes in Asia and Europe lower.
The sell-off would mark a huge defeat for the Washington, D.C.-based Carlyle
Group, one of the largest private equity firms in the world with $76 billion
in assets. Carlyle Capital, registered in Britain but managed by New
York-based executives, was the first of its 55 funds to go public.
Since the beginning of the credit crunch, Carlyle Group has extended
loans to Carlyle Capital to help meet margin calls, including a $150 million
revolving loan, Citigroup analyst Donald Fandetti told investors in a
research note March 6.
"It appears CCC is fully drawn on this line
and so far no further loans have been provided."
Andrew Wilkinson, senior market analyst
at Interactive Brokers Group LLC, said it didn't make sense for Carlyle
Group to keep bailing out its mortgage-focused fund.
"If it's a standalone entity that's
vulnerable to failure, then you let it go and you bear the consequences
but you certainly don't throw good money after bad," Wilkinson said.
More than a year ago, the fund leveraged its
$670 million equity 32 times to finance a $21.7 billion portfolio of
AAA-rated residential mortgage-backed securities issued by Freddie Mac
and Fannie Mae. It borrowed money from at least a dozen banks and firms,
including Bank of America Corp., Citigroup Inc. and Merrill Lynch & Co.
Carlyle Capital posted the securities as collateral under repurchase
agreements, so if the value of the securities fall, the lender has the right
to ask for more collateral "a margin call" to secure the loan. If the
borrower does not meet the margin call, the lender may sell the security.
The value of mortgage-backed securities has plummeted as U.S. home prices
fall and foreclosures surge, prompting the banks to ask Carlyle Capital for
more than $400 million in additional capital. The fund was unable to come up
with the money, prompting lenders to start foreclosing on the securities.
As of Wednesday, Carlyle Capital said it has defaulted on about $16.6
billion of its debt, and the rest is expected to go into default soon. About
$5.7 billion of the defaulted debt has been sold, the Carlyle Group said
Thursday.
Spokeswoman Emma Thorpe said she
couldn't say what has been done with the rest.
Carlyle Group "participated actively" in the fund's negotiations with its
lenders to refinance its portfolio and was prepared to provide substantial
additional capital if sustainable terms could be achieved, the fund's
statement said.
But hopes for refinancing fell apart after some lenders said the value of
the collateral had declined further, which would result in additional margin
calls Thursday of about $97.5 million.