/ 13 March 2008

Carlyle Capital in default, on brink of collapse

An affiliate of United States-based buyout firm Carlyle Group has defaulted on about $16,6-billion of debt and expects its lenders to seize remaining assets as the global credit crunch tightens around leveraged investors.

Carlyle Capital Corporation, a fund listed in Amsterdam, said in New York late on Wednesday that talks with lenders deteriorated after a drop in the value of its mortgage investments, which it said would result in margin calls of $97,5-million on top of the $400-million it was already facing.

A ”successful refinancing is not possible,” Carlyle Capital said, after trying for the past week to work out a deal with lenders to stave off bankruptcy.

Bund futures in Europe rose after the news back to levels they traded at before the US Federal Reserve and other central banks coordinated on Tuesday to inject liquidity into credit markets. The dollar also fell.

The credit crunch, triggered last year when subprime mortgages made to risky US borrowers went sour, has put increasing pressure on lenders to shore up capital and made it difficult to value collateralised debt, mortgage portfolios and other fixed-income securities — the investments in which Carlyle Capital was set up to invest.

”We’ve been expecting for a while for the hedge funds to get into trouble,” said Andrea Cicione, a credit strategist at BNP Paribas, one of Carlyle Capital’s lenders. He noted that Carlyle Capital had to come clean because it was listed, and he expected more funds to go bust.

The default by the fund prompted spreads to widen on the iTRAXX Asia ex-Japan investment grade index, and European credit spreads also widened, returning close to record wide levels touched earlier in the week.

June Bund futures were 35 ticks higher at 117,98, and the dollar was near 12-year lows against the yen.

Carlyle Capital, based in Britain’s offshore dependency of Guernsey, said the only assets it has left are AAA-rated residential mortgage-backed securities, and it expects lenders to foreclose on this collateral.

”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,” it said.

Its shares tumbled 73% to $0,73 by noon GMT, a fraction of their $20 debut price last July. Dutch market regulator AFM said it was monitoring developments closely.

Among the counterparties for Carlyle’s repurchasing agreements, Deutsche Bank, Merrill Lynch & Co and Bear Stearns Cos have sold off assets, the Wall Street Journal reported.


”The credit angst is back,” said Tim Condon, head of Asia research with investment bank ING.

Fears that more private equity groups, hedge funds and mortgage lenders are struggling with their financing are putting heavy pressure on global equity markets, which have tumbled on fears of a US recession and the widening fallout from a global credit crunch.

On Tuesday, the US Federal Reserve expanded a securities lending programme to prove short-term liquidity of $200-billion.

US-based buyout giant Carlyle Group participated actively in the negotiations with lenders and last year extended a $150-million credit line to its affiliate.

Managers at Carlyle Group own about 15% of Carlyle Capital Corporation (CCC), which listed in July 2007, as the credit crunch began to take hold of the global financial system.

The Carlyle Group, based in Washington, DC, has more than $75-billion under management and has attracted a string of high-profile advisers, including US President George Bush in the early 1990s and former British prime minister John Major.

One of the world’s largest private equity firms, the Carlyle Group owns a range of companies including TV ratings firm Nielsen, doughnut seller Dunkin’ Brands and former General Motors unit Allison Transmission.

According to CCC’s annual report, counterparties for its repurchasing agreements at the end of 2007 were Bank of America, Bear Stearns, BNP Paribas, Calyon, Citigroup, Credit Suisse, Deutsche Bank, ING, JP Morgan, Lehman Brothers, Merrill Lynch and UBS. — Reuters