Friday, March 7, 2008

Carlyle Group Scorched by Mortgage Fund's Blowup

Carlyle Group Scorched by Mortgage Fund's Blowup

By Edward Evans

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The collapse of the subprime- mortgage market has engulfed Carlyle Group, the world's second- biggest leveraged-buyout firm by assets.

Carlyle Capital Corp., the firm's mortgage-bond fund, was suspended from Amsterdam trading today after it failed to repay lenders, who in turn sold assets held as collateral. The fund expects more margin calls, which may deplete capital. The pool may be liquidated and the stock left worthless, Bear Stearns Cos. analyst Keith Baird said in a note to clients.

``This marks a further savage step in the ongoing credit implosion of recent months,'' Baird wrote today.

The blowup is a rare set-back for Carlyle founder David Rubenstein, who created the fund and tapped public markets for $300 million as part of efforts to expand his Washington-based firm beyond LBOs. Though not obligated, Carlyle Group has extended $150 million in credit to Carlyle Capital since August. It hasn't said how much of that has been used.

If Carlyle Group doesn't provide more financing, the fund ``could be forced into significant asset sales into a weak market or could face bankruptcy,'' Citigroup Inc. analysts including Donald Fandetti in New York wrote yesterday in a note to investors.

Carlyle Capital is ``considering all options,'' the fund said in its statement. Carlyle Group, which has about $30 billion in uncommitted capital across its funds, has no financial ties to Carlyle Capital beyond the $150 million credit line.

No Impact

``We believe the challenges facing CCC will have no material impact on the Carlyle Group or any of Carlyle's other funds,'' Carlyle spokeswoman Ellen Gonda said today.

The fund plunged 58 percent yesterday to $5 after first disclosing it couldn't meet lenders' demands for more collateral to offset a decline in its holdings. Carlyle sold the shares for $19 in an initial public offering in July.

The fund, run by John Stomber, originally delayed and then cut the size of the IPO by about 25 percent as the subprime contagion began. It then added the money raised in July to a private $590 million pool opened in 2006. For every dollar of equity, the pool borrowed $32.

Guernsey, U.K.-based Carlyle Capital bought about $22 billion of AAA rated mortgage debt issued by Fannie Mae and Freddie Mac, notes that it says have the ``implicit guarantee'' of the U.S. government.

The effect of the U.S. subprime-mortgage market collapse has spilled over into top-rated agency debt, knocking down the value of the residential mortgage-backed securities.

Hoarding Cash

The agency mortgage-bond market has about $4.5 trillion of securities, according to estimates from UniCredit SpA. The spread between 30-year agency mortgage bonds and 10-year U.S. Treasuries widened to more than 200 basis points this week, the highest since 1986, according to data compiled by Bloomberg.

Carlyle's counterparties are Wall Street firms, which use repurchase agreements to lend money and require securities be put up as collateral. As the perceived credit worthiness of asset-backed bonds declined, the amount of money that can be borrowed using them as collateral fell.

``Banks are hoarding cash, they're having difficulty funding themselves,'' said Willem Sels, a credit strategist at Dresdner Kleinwort in London. ``Our concern is that market moves in price lead to mark-to-market losses, which lead to margin calls and forced selling, and then more losses in a vicious circle.''

KKR Financial Holdings LLC, Kohlberg Kravis Roberts & Co.'s debt-investment affiliate, said yesterday it's in ``good shape'' and can weather the credit-market slump.

``We are not cavalier, we clearly admit the environment has deteriorated,'' Saturnino Fanlo, chief executive officer of the San Francisco-based company, said on a conference call with investors. ``KFN is in good shape for tumultuous markets.''

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